FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 1-13123
METALS USA, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
76-0533626
(I.R.S. Employer
Identification Number)
THREE RIVERWAY, SUITE 600
HOUSTON, TEXAS
(Address of Principal Executive Offices)
77056
(Zip Code)
Registrant's telephone number, including area code: (713) 965-0990
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 |_|
Number of shares of common stock outstanding at November 13, 1997: 26,982,969
<PAGE>
METALS USA, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
----
Item 1.Financial Statements
Unaudited Pro Forma Combined Statements of Operations for the three and
nine months ended September 30, 1997 and 1996..............................
Consolidated Balance Sheets of Metals USA, Inc. at September 30, 1997 and
December 31, 1996..........................................................
Consolidated Statements of Operations of Metals USA, Inc. for the three and
nine months ended September 30, 1997 and 1996..............................
Consolidated Statements of Cash Flows of Metals USA, Inc. for the nine
months ended...............................................................
September 30, 1997 and 1996................................................
Condensed Notes to Consolidated Financial Statements.......................
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings......................................................
Item 5.Other Information......................................................
Item 6.Exhibits and Reports on Form 8-K.......................................
Signatures....................................................................
2
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales............................. $144,983 $130,315 $428,422 $395,489
Costs and expenses:
Cost of sales....................... 110,649 99,050 326,978 299,100
Operating and delivery.............. 15,792 14,520 46,949 42,660
Selling, general and administrative. 9,505 8,060 26,189 24,298
Depreciation and amortization....... 1,933 2,010 6,162 5,872
------- -------- -------- -------
Operating income...................... 7,104 6,675 22,144 23,559
Interest expense...................... 1,474 1,180 4,386 3,620
Other................................. (314) (163) (470) (410)
------- -------- -------- -------
Income before income taxes............ 5,944 5,658 18,228 20,349
Provision for income taxes............ 2,395 2,485 7,856 8,805
------- -------- -------- -------
Net income............................ $ 3,549 $ 3,173 $ 10,372 $11,544
======= ======== ======== =======
Earnings per share.................... $ .14 $ .12 $ .40 $ .44
======= ======== ======== =======
Shares used in the pro forma
computation of earnings per
common share........................ 26,225,722 6,154,716 26,178,473 26,154,716
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- -------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash....................................................... $ 10,949 $ 1,208
Accounts receivable........................................ 88,852 13,361
Inventory.................................................. 124,486 21,512
Prepaid expenses and other................................. 6,005 1,331
-------- -------
Total current assets..................................... 230,292 37,412
Property and equipment, net................................ 51,420 15,282
Goodwill................................................... 122,563 -
Other...................................................... 5,651 1,879
-------- -------
$409,926 $54,573
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 55,952 $ 6,998
Accrued liabilities........................................ 9,056 1,302
Income taxes payable....................................... 1,933 482
Current portion of long-term debt.......................... 2,812 1,131
Other...................................................... 1,963 -
-------- -------
Total current liabilities................................ 71,716 9,913
Long-term debt............................................. 137,842 17,037
Deferred income taxes...................................... 6,117 326
Other...................................................... 3,317 461
-------- -------
Total liabilities........................................ 218,992 27,737
-------- -------
Stockholders' equity:
Preferred stock, $0.01 par, 5,000,000 shares authorized,
none issued and outstanding............................ - -
Common stock, $0.01 par, 53,122,914 shares
authorized, 26,982,969 and 7,791,497 shares
issued and outstanding at September 30, 1997,
and December 31, 1996, respectively ................... 270 78
Additional paid-in capital............................... 169,360 3,999
Unearned compensation.................................... (1,535) (1,794)
Retained earnings........................................ 22,839 24,553
-------- -------
Total stockholders' equity............................. 190,934 26,836
-------- -------
$409,926 $54,573
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales.............................. $130,860 $ 33,631 $195,328 $103,363
Costs and expenses:
Cost of sales........................ 99,926 25,192 147,632 77,834
Operating and delivery............... 14,211 3,738 21,321 10,575
Selling, general and administrative.. 9,105 2,814 20,199 7,966
Depreciation and amortization........ 1,782 618 3,075 1,710
------- -------- -------- -------
Operating income....................... 5,836 1,269 3,101 5,278
Interest expense....................... 1,474 358 2,026 933
Other.................................. (277) (25) (315) (39)
------- -------- -------- -------
Income before income taxes............. 4,639 936 1,390 4,384
Provision for income taxes............. 2,050 340 3,104 1,678
------- -------- -------- -------
Net income (loss)...................... $ 2,589 $ 596 $ (1,714) $ 2,706
======= ======== ======== =======
Earnings (loss) per share.............. $ .11 $ .07 $ (.12) $ .48
======= ======== ======== =======
Shares used in the computation of
earnings per common share..............24,241,742 8,724,763 14,259,702 5,590,644
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss)........................................ $(1,714) $ 2,706
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for bad debts................................ 103 143
Depreciation and amortization.......................... 3,075 1,710
(Gain) loss on sale of property and equipment.......... (35) 76
Deferred income taxes.................................. (118) (95)
Accrued retirement plan contributions.................. (106) 661
Compensation expense related to issuance of management
shares............................................... 6,048 -
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts and notes receivable........................ (3,721) (537)
Inventory............................................ 1,815 (5,408)
Other assets......................................... 759 (159)
Accounts payable..................................... (2,017) 4,289
Income taxes payable................................. 989 (34)
Accrued liabilities.................................. 280 1
Other operating...................................... 542 -
------- -------
Net cash provided by operating activities........ 5,900 3,353
------- -------
Cash flows from investing activities:
Proceeds from sale of assets............................. 675 10
Purchases of property.................................... (3,766) (3,221)
Proceeds applied to cash value life insurance............ (95) (102)
Issuance of notes receivable to affiliates............... (204) (246)
Collections on notes receivable from affiliates.......... 414 283
Purchase of businesses, net of acquired cash............. (64,495) -
------- -------
Net cash used in investing activities............ (67,471) (3,276)
------- -------
Cash flows from financing activities:
Issuance of stock........................................ 58,610 1
Borrowings on notes payable.............................. - 481
Principal payments on notes payable...................... (38,956) (520)
Borrowings on revolving credit facility.................. 106,228 30,993
Payments on revolving credit facility.................... (54,570) (29,639)
Borrowings on notes payable to affiliates................ - 213
Principal payments on notes payable to affiliates........ - (396)
------- -------
Net cash provided by financing activities........ 71,312 1,133
------- -------
Net increase in cash....................................... 9,741 1,210
Cash, beginning of period.................................. 1,208 335
------- -------
Cash, end of period........................................ $10,949 $ 1,545
======= =======
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Metals USA, Inc., a Delaware corporation, ("Metals" or the "Company") was
founded in July 1996 to become a leading national value-added metals
processor/service center, to manufacture higher-value components from processed
metals and to pursue aggressively the consolidation of the highly fragmented
metals processing industry. Prior to its initial public offering, Metals had
conducted no operations. Metals initial public offering of 5,900,000 shares of
common stock and the subsequent sale of shares pursuant to the overallotment
option (885,000) were consummated on July 11, 1997 and August 12, 1997,
respectively and are collectively referred to herein as the "IPO." Concurrently
with the consummation of the IPO, which resulted in net proceeds of $58,600,
Metals acquired, in separate merger transactions eight companies (the "Founding
Companies") engaged in the processing of steel, aluminum and specialty metals,
as well as the manufacture of metal components. The net proceeds in excess of
cash required for the acquisition of the Founding Companies was used to retire a
portion of the Founding Companies debt. Subsequent to the acquisition of the
Founding Companies, Metals has acquired four additional companies (the
"September Acquisitions") in similar businesses. See Note 4. The Founding
Companies and September Acquisitions are referred to, collectively, as the
"Acquired Companies."
Metals had not conducted any revenue generating activities of its own prior
to the IPO. For the period from inception through July 11, 1997, Notre Capital
Ventures II, L.L.C. ("Notre") provided the financial backing and agreed to fund
the costs that were necessary to effect the Metals IPO, which were estimated to
aggregate approximately $4,500. Metals repaid Notre $1,310 of such cash
advances, which were made prior to July 11, 1997, with a portion of the net
proceeds it received from the IPO.
BASIS OF PRESENTATION
PRO FORMA STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations give effect to the
acquisition of the Founding Companies and the IPO as if they had occurred on
January 1, 1996. The September Acquisitions are included in the pro forma
statements of operations only for those periods subsequent to their respective
dates of acquisition, except for those accounted for using the
"pooling-of-interests" method, which are included as of January 1, 1996.
To the extent the former owners of the Acquired Companies agreed
prospectively to reductions in salary, bonuses and benefits and certain
reductions in lease costs (which have been conformed to the amounts stated in
the operative lease agreements), these reductions have been reflected in the pro
forma combined statements of operations. In addition, the Company has a $150,000
five-year revolving credit facility (the "Credit Facility") which became
available upon the closing of the IPO. Based on terms of the Credit Facility, a
reduction in interest expense has been reflected in the pro forma combined
statements of operations. With respect to other potential cost savings, the
Company has not and cannot quantify such savings; however, it is anticipated
that a portion of such savings will be offset by costs related to additional
overhead attributable to the Company's corporate staff and by the costs
associated with being a public company. However, because these savings cannot be
accurately quantified, they have not been included in the pro forma combined
financial information of the Company.
7
<PAGE>
METALS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The pro forma adjustments are based on estimates, available information and
certain assumptions, which may be revised, as additional information becomes
available. The pro forma combined statements of operations do not purport to
represent what the Company's consolidated results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's results of operations for any future
period. Since the Acquired Companies were not under common control or
management, historical consolidated results may not be comparable to, or
indicative of, future performance.
HISTORICAL RESTATEMENT FOR "POOLING-OF-INTERESTS" ACQUISITIONS
Included in the September Acquisitions completed by Metals on September
26, 1997 was Jeffreys Steel Company, Inc. ("Jeffreys") which was accounted for
using the "pooling-of-interests" method, resulting in a restatement of the
Company's financial statements for all periods presented herein.
The following table summarizes the restated consolidated revenues, net
income and per share data of the Company after giving effect to the acquisition
of Jeffreys (in thousands of dollars, except share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------- ---------------------
NET SALES NET NET SALES NET
INCOME INCOME
---------- -------- ------------ --------
Net sales and net income -
As previously reported.......... $ - $ - $ - $ -
Acquisition accounted for as
"pooling-of-interests"........ 33,631 596 103,363 2,706
------- ------- ------- -------
As restated................. $33,631 $ 596 $103,363 $ 2,706
======= ======= ======== =======
Net income per share -
As previously reported.......... $ - $ -
Acquisition accounted for as
"pooling-of-interests"........ .07 .48
------- -------
As restated................. $ .07 $ .48
======= =======
INTERIM FINANCIAL INFORMATION
The pro forma combined and interim consolidated financial statements
included herein are unaudited; however, they include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary to present
fairly the pro forma combined and interim consolidated financial information
presented herein as of and for the periods indicated. All intercompany
transactions and balances have been eliminated. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year-end.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
The information contained in the following notes to the accompanying
consolidated financial statements is condensed from that which would appear in
the annual audited financial statements; accordingly, the financial statements
included herein should be reviewed in conjunction with the Company's audited
consolidated financial statements and related notes thereto contained in the
Shelf Registration Statement filed with the Securities and Exchange Commission
on Form S-1 (Registration Statement No. 333-35575, filed on November 14, 1997,
referred to herein as the "Prospectus"). Certain capitalized terms used herein
have the same meaning given to them in the Prospectus.
8
<PAGE>
METALS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates and assumptions are also used in the determination of the
reported amounts of net sales and expenses during a reporting period.
Actual results could differ from those estimates.
2. LONG-TERM DEBT
The Company entered into a revolving credit facility (the "Credit Facility")
with the First Chicago NBD as agent, on July 15, 1997. The Credit Facility
matures on July 15, 2002, bears interest at the bank's prime rate or LIBOR, at
the Company's option, plus an applicable margin based on the ratio of funded
debt to cash flows (as defined). An annual commitment fee of up to 1/4% is
payable on any unused portion of the Credit Facility. At September 30, 1997,
$130.0 million was outstanding and $20.0 million was available to the Company
under the Credit Facility.
The Credit Facility will be used to fund acquisitions, capital expenditures
and working capital requirements. Under the terms of the Credit Facility the
Company is required to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness, (iii) restrictions on liens, guarantees and dividends,
(iv) obtaining the lenders' consent with respect to certain individual
acquisitions, and (v) the maintenance of a specified level of consolidated
tangible net worth. The Company used a portion of the Credit Facility together
with the net proceeds from the IPO to retire substantially all of the
indebtedness of the Acquired Companies.
3. PER SHARE INFORMATION
Generally, per share calculations are based on the weighted average number
of common shares outstanding in each period and, if dilutive, weighted average
common equivalent shares assumed to be issued from the exercise of common stock
options based upon the average price of the Company's common stock during the
period. There were no stock options outstanding with respect to periods ending
before July 11, 1997 for any of the Acquired Companies. The effect of stock
options was included in the following computations only to the extent they were
dilutive.
Pro forma earnings per share were computed assuming all of the shares issued
and outstanding upon completion of the IPO (21,667,023 shares) were issued and
outstanding as of January 1, 1996. These shares include shares issued to
consultants, members of management and the former owners of the Founding
Companies, together with the shares sold pursuant to the IPO. Shares issued in
connection with the September Acquisitions are included in the computation of
weighted average shares outstanding only for those periods subsequent to their
respective dates of acquisition, except for those accounted for using the
"pooling-of-interests" method, in which case the shares are reflected in the
computation of weighted average shares outstanding as of the beginning of the
earliest period presented.
Historical earnings per share were computed using the aggregate number of
shares issued in connection with the acquisition of entities accounted for using
the "pooling-of-interests" method of accounting for periods prior to July 3,
1996 (date of inception). Shares issued in connection with the organization of
Metals, including shares issued to management, were considered to be issued and
outstanding from the date of inception without regard to the date such shares
were actually issued. Shares issued in connection with the IPO and in connection
with acquisitions accounted for using the "purchase" method of accounting have
been included in the computation only from their respective effective
acquisition dates.
9
<PAGE>
METALS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). For the Company, SFAS No. 128 will be effective for the year ended
December 31, 1997. SFAS No. 128 simplifies the standards required under current
accounting rules for computing earnings per share ("EPS") and replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").
Basic EPS excludes dilution and is determined by dividing income available to
common stockholders by the weighted average number of shares of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. Diluted EPS is computed similarly to
fully diluted earnings per share under current accounting rules. The
implementation of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share as determined under current accounting rules.
4. ACQUISITIONS
Concurrently with and as a condition to the consummation of the IPO on July
11, 1997, Metals acquired all of the outstanding capital stock of the Founding
Companies. The companies acquired were the Texas Aluminum/Cornerstone group of
companies, Interstate Steel Supply Co., Queensboro Steel Corporation, Affiliated
Metals Company, Uni-Steel Incorporated, Southern Alloy of America, Inc.,
Williams Steel & Supply Co., Inc. and Steel Service Systems, Inc. The aggregate
consideration paid by Metals to acquire the Founding Companies was approximately
$27,826 in cash and 10,128,609 shares of common stock (excluding assumed
indebtedness of approximately $92,600).
On September 26, 1997, Metals acquired four additional metal processing
companies, including Jeffreys, Meier Metal Servicenters, Inc. ("Meier"), Harvey
Titanium Ltd. ("Harvey"), and the business of Federal Bronze Products Inc. which
was acquired by a newly-organized and wholly-owned subsidiary of Metals, Federal
Bronze Alloys Inc. ("Federal Bronze"). With the exception of Jeffreys, these
acquisitions were accounted for using the "purchase" method of accounting. The
aggregate consideration paid by Metals to acquire the September Acquisitions was
approximately $41,406 in cash and 5,315,946 shares of common stock (excluding
assumed indebtedness of approximately $21,750).
The accompanying consolidated balance sheet as of September 30, 1997
includes preliminary allocations of the respective purchase prices for the
Founding Companies and the September Acquisitions (except Jeffreys) and is
subject to final adjustment.
5. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Supplemental cash flow information:
Cash paid for interest..................... $ 1,640 $ 708
Cash paid for income taxes................. 1,350 1,712
Non-cash investing and financing activities:
Retirement plan contribution charged to
unearned compensation
and additional paid-in capital........... 355 474
Assets of Acquired Companies, net of
cash acquired and liabilities assumed ... 100,799 -
COMPENSATION CHARGE
During 1996 and the first and second quarters of 1997, Metals sold an
aggregate of 1,385,500 shares of common stock to management of and consultants
to the Company for $0.01 per share. As a result, the Company has recorded
non-recurring, non-cash compensation charges of $3,636 in 1996 and $2,813 and
$4,725 in the first and second quarters of 1997, respectively, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of sale, as if the Founding Companies were combined.
In addition, the second quarter reflects a reduction in compensation expense of
$1,475 representing a revision of the estimated fair value of the shares sold to
management and consultants in 1996 and the first quarter of 1997.
6. SUBSEQUENT EVENT
On October 29, 1997, the Company and Wayne Steel, Inc. ("Wayne Steel")
announced the signing of a definitive agreement for the acquisition of Wayne
Steel. The acquisition will be accounted for as a "pooling-of interests" and is
expected to close in November, following the receipt of the necessary approvals
from the Federal Trade Commission and completion of other administrative
matters. Wayne Steel is headquartered in Wooster, Ohio, was founded in 1921 by
Meyer Shapiro and operates in Randleman, North Carolina as well as a newly
constructed processing facility scheduled to open in Jeffersonville, Indiana in
late 1997. Wayne Steel is a value-added metals processor of flat rolled steel
providing products and services primarily in the transportation, electrical and
telecommunications equipment manufacturing industries.
11
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS STATEMENTS, WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "ESTIMATES,"
"WILL," "SHOULD," "PLANS" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY.
READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, MOST OF WHICH
ARE BEYOND THE CONTROL OF MANAGEMENT. THESE FACTORS INCLUDE GENERAL ECONOMIC AND
BUSINESS CONDITIONS, NEW OR MODIFIED STATUTORY OR REGULATORY REQUIREMENTS,
CHANGING PRICES AND MARKET CONDITIONS, AND THE EFFECTIVENESS OF MANAGEMENT'S
STRATEGIES AND DECISIONS. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL OF THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS.
The following should be read in conjunction with the response to Part I,
Item 1 of this Report and the Company's audited consolidated financial
statements contained in the Prospectus. Any capitalized terms used but not
defined in this Item have the same meaning given to them in the Prospectus.
INTRODUCTION
The Company's net sales are derived from the processing of steel, aluminum
and other specialty metals and the use of processed metals to manufacture
high-value end-use products. The majority of the metals sold by the Company are
processed by the Company. The Company processes various metals to specified
thickness, length, width, shape and surface quality pursuant to specific
customer orders. Additionally, certain of the Acquired Companies manufacture
finished building products for commercial and residential applications and
machine certain specialty metals.
The Acquired Companies have operated as privately-owned entities and their
results of operations reflect varying tax structures ("S Corporations" or "C
Corporations") which have influenced the level of owners' compensation. The
owners of the Acquired Companies have contractually agreed to certain reductions
in both their compensation and benefits and in certain cases lease payments for
their respective facilities in connection with the acquisitions. These cost
savings are reflected in the pro forma financial statements. On a pro forma
basis, assuming each of the Founding Companies and the September Acquisitions
were wholly-owned subsidiaries of Metals as of January 1, 1996, net sales would
have been $210.4 million and $626.5 million and operating income would have been
$11.5 million and $35.4 million for the three and nine months ended September
30, 1997; net sales would have been $185.8 million and $563.8 million and
operating income would have been $11.1 million and $35.8 million for the three
and nine months ended September 30, 1996, respectively.
The Company anticipates that it will realize savings from: (i) greater
volume discounts from raw materials and other suppliers and (ii) consolidation
of insurance, employee benefit programs and other general and administrative
costs. It is anticipated that these savings will be offset by costs related to
the Company's corporate management and by the costs attributable to being a
public company, at least until the Company's cost savings program can be fully
implemented. The Company's pro forma financial statements do not reflect any
amounts as may be realized from future cost savings.
The Company recorded the excess of the fair value of the consideration paid
(exclusive of debt assumed), over the fair value of the net assets acquired with
respect to the Founding Companies as "goodwill." Collectively, the amount by
which the excess of consideration paid (exclusive of debt assumed) over the fair
value of the net assets acquired from the merger of the Founding Companies
together with the merger of the September Acquisitions that were accounted for
using the "purchase" method of accounting, totaled approximately $122.6 million
at September 30, 1997. Generally accepted accounting principles require the
amortization of goodwill, as a non-cash charge to operating income, over its
estimated useful life, not to exceed 40 years. The pro forma impact of the
amortization expense attributable to the goodwill created with respect to the
Founding Companies is approximately $2.1 million per year and is not deductible
for income tax purposes. The pro forma impact of the amortization expense
attributable to the goodwill created from the September Acquisitions that were
accounted for using the "purchase" method of accounting, is approximately $1.0
million per year, a portion of which will be deductible for income tax purposes.
12
<PAGE>
The accounting classifications used by the Company to present the
consolidated results of operations generally conform to the conventions
established by the Steel Service Center Institute ("SSCI") and the National
Association of Aluminum Distributors. Depreciation and amortization expenses are
shown separately as management believes certain investors find the information
beneficial. Brief descriptions of the classifications are as follows:
NET SALES. Net sales include sales of materials, processing and fabrication,
less sales returns, allowances and cash discounts. Net sales do not include any
sales or use taxes collected.
COST OF SALES. Cost of sales include the cost of material and freight and
all processing services purchased from unaffiliated third parties, less any
applicable purchase discounts realized. The Company carries a substantial
quantity of raw material inventories and five of its subsidiaries use the
last-in first-out ("LIFO") method of accounting. The LIFO method of accounting
generally matches current costs more closely with current sales. However,
variations in inventory quantities and/or prices may have a significant impact
on cost of sales.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses consist of
labor, utilities, rent, repairs and maintenance expenses attributable to
material processing operations, warehouse facilities and delivery operations,
including the cost of freight attributable to product shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the cost of personnel conducting sales and
administrative activities (including commissions and other forms of incentive
compensation), advertising and marketing expenses, rent, utilities, repairs and
maintenance costs for non-warehouse facilities, professional fees, property
taxes and other costs not included in the preceding classifications that are
directly attributable to operations.
13
<PAGE>
RESULTS OF OPERATIONS
The following historical financial information reflects the historical
financial statements of Metals restated for the effects of the business
combination with Jeffreys accounted for as a "pooling-of-interests" and the
remaining Acquired Companies from their respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
1997 % 1996 % 1997 % 1996 %
--------------------- --------------------- --------------------- ---------------------
(IN MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ 130.8 100.0 $ 33.6 100.0 $ 195.3 100.0 $ 103.4 100.0
Cost of sales ............ 99.9 76.4 25.2 75.0 147.6 75.6 77.8 75.2
Operating and delivery.... 14.2 10.8 3.7 11.0 21.3 10.9 10.6 10.3
Selling, general and
administrative......... 9.1 7.0 2.8 8.3 20.2 10.3 8.0 7.7
Depreciation and 1.8 1.4 0.6 1.8 3.1 1.6 1.7 1.7
amortization........... ------- ------- -------- ------ ------- ------- -------- ------
Operating income.......... 5.8 4.4 1.3 3.9 3.1 1.6 5.3 5.1
Interest expense.......... 1.5 1.1 0.4 1.2 2.0 1.0 0.9 0.9
Other..................... (0.3) (0.2) - - (0.3) (0.1) - -
-------- -------- --------- ------- -------- -------- --------- -------
Income before income taxes $ 4.6 3.5 $ 0.9 2.7 $ 1.4 0.7 $ 4.4 4.2
======== ======== ========= ======= ======== ======== ========= =======
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1996
NET SALES. Net sales increased $97.2 million, or 289.3%, from $33.6 million
for the three months ended September 30, 1996 to $130.8 million for the three
months ended September 30, 1997. The increase in net sales was principally due
to the acquisition of the Founding Companies on July 11, 1997. The Founding
Company acquisitions accounted for substantially all of the additional net
sales. The purchase acquisitions of Harvey, Meier and Federal Bronze on
September 26, 1997 did not have a significant impact on net sales or results of
operations for the three months ended September 30, 1997.
COST OF SALES. Cost of sales increased $74.7 million, or 296.4%, from $25.2
million for the three months ended September 30, 1996, to $99.9 million for the
three months ended September 30, 1997. The increase in cost of sales was
principally due to the acquisitions described above. As a percentage of net
sales, cost of sales increased from 75.0% for the three months ended September
30, 1996 to 76.4% for the three months ended September 30, 1997. This percentage
increase was due to higher cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $10.5
million, or 283.8%, from $3.7 million for the three months ended September 30,
1996 to $14.2 million for the three months ended September 30, 1997. The
increase in operating and delivery expenses was principally due to the
acquisitions described above. As a percentage of net sales, operating and
delivery expenses decreased from 11.0% for the three months ended September 30,
1996 to 10.8% for the three months ended September 30, 1997. This percentage
decrease was primarily due to spreading of fixed operating costs over a higher
volume of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $6.3 million, or 225.0%, from $2.8 million for the three
months ended September 30, 1996 to $9.1 million for the three months ended
September 30, 1997. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above, and to
a lesser extent to increased volumes of product shipments. As a percentage of
net sales, selling, general and administrative expenses decreased from 8.3% for
the three months ended September 30, 1996 to 7.0% for the three months ended
September 30, 1997. This percentage decrease was primarily due to spreading of
fixed operating costs over a higher volume of net sales.
14
<PAGE>
OPERATING INCOME. Operating income increased $4.5 million, or 346.2%, from
$1.3 million for the three months ended September 30, 1996 to $5.8 million for
the three months ended September 30, 1997. The increase in operating income was
attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 3.9% for the three months ended September 30,
1996 to 4.4% for the three months ended September 30, 1997.
INTEREST EXPENSE. Interest expense increased $1.1 million, or 275.0%, from
$0.4 million for the three months ended September 30, 1996 to $1.5 million for
the three months ended September 30, 1997. The increase in interest expense was
primarily due to the purchase of the Founding Companies on July 11, 1997.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
NET SALES. Net sales increased $91.9 million, or 89.0%, from $103.4 million
for the nine months ended September 30, 1996 to $195.3 million for the nine
months ended September 30, 1997. The increase in net sales was principally due
to increased shipments attributable to the acquisition of the Founding Companies
on July 11, 1997. The purchase acquisitions of Harvey, Meier and Federal Bronze
on September 26, 1997 did not have a significant impact on net sales or results
of operations for the nine months ended September 30, 1997.
COST OF SALES. Cost of sales increased $69.8 million, or 89.7%, from $77.8
million for the nine months ended September 30, 1996 to $147.6 million for the
nine months ended September 30, 1997. The increase in cost of sales was
principally due to the increased shipments attributable to the business
acquisitions described above. As a percentage of net sales, cost of sales
increased from 75.2% for the nine months ended September 30, 1996 to 75.6% for
the nine months ended September 30, 1997. This percentage increase was due to
higher cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $10.7
million, or 100.9%, from $10.6 million for the nine months ended September 30,
1996 to $21.3 million for the nine months ended September 30, 1997. The increase
in operating and delivery expenses was principally due to the increased
shipments attributable to the business acquisitions described above. As a
percentage of net sales, operating and delivery expenses increased from 10.3%
for the nine months ended September 30, 1996 to 10.9% for the nine months ended
September 30, 1997. This percentage increase was primarily due to higher
transportation costs to support an expanding market area.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $12.2 million, or 152.5%, from $8.0 million for the nine
months ended September 30, 1996 to $20.2 million for the nine months ended
September 30, 1997. This increase in selling, general and administrative
expenses was primarily attributable to the business acquisitions described
above. Additionally, the Company recorded a $6.0 million compensation charge
during the first and second quarters of 1997 related to 985,000 shares of Common
Stock that were sold to consultants and members of management at $0.01 per
share. As a percentage of net sales, selling, general and administrative
expenses increased from 7.7% for the nine months ended September 30, 1996 to
10.3% for the nine months ended September 30, 1997. This percentage increase was
primarily due to the compensation charge described.
OPERATING INCOME. Operating income decreased $2.2 million, or 41.5%, from
$5.3 million for the nine months ended September 30, 1996 to $3.1 million for
the nine months ended September 30, 1997. The decrease in operating income was
primarily attributable to the $6.0 million compensation charge discussed above.
As a percentage of net sales, operating income decreased from 5.1% for the nine
months ended September 30, 1996 to 1.6% for the nine months ended September 30,
1997.
15
<PAGE>
INTEREST EXPENSE. Interest expense increased $1.1 million, or 122.2%, from
$0.9 million for the nine months ended September 30, 1996 to $2.0 million for
the nine months ended September 30, 1997. The increase in interest expense was
primarily due to the purchase of the Founding Companies on July 11, 1997.
FINANCIAL CONDITION AND FINANCING AND INVESTING ACTIVITIES
The Company generated $5.9 million and $3.4 million in net cash from
operating activities for the nine months ended September 30, 1997 and 1996,
respectively. Net cash used for investing activities was $67.5 million and $3.3
million for the nine months ended September 30, 1997 and 1996, respectively. The
principal use of cash during the nine months ended September 30, 1997 was to
fund the cash portion of the acquisition cost for the Acquired Companies and the
repayment of a portion of the assumed indebtedness of the Acquired Companies.
Net cash provided by financing activities was $71.3 million and $1.1 million for
the nine months ended September 30, 1997 and 1996, respectively. For the nine
months ended September 30, 1997, the cash provided by financing activities
consisted primarily of the net proceeds from the sale of Common Stock of $58.6
million in connection with the IPO and borrowings under the Credit Facility. At
December 31, 1996, the Company had cash of $1.2 million, working capital of
$27.5 million and total debt of $18.2 million. At September 30, 1997, the
Company had cash of $10.9 million, working capital of $158.6 million and total
debt of $140.7 million.
The Company has a five-year unsecured revolving credit facility of $150.0
million (the "Credit Facility"). The Credit Facility will be used to fund
acquisitions, make capital expenditures, refinance debt of the Acquired
Companies and for general working capital requirements. The Credit Facility
requires the Company to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness, (iii) restrictions on liens, guarantees and dividends,
(iv) obtaining the lenders' consent with respect to certain individual
acquisitions, and (v) maintenance of a specified level of consolidated tangible
net worth. At September 30, 1997, $130.0 million was outstanding and $20.0
million was available to the Company under the Credit Facility.
The Company intends to continue to actively pursue acquisition
opportunities. The Company expects to fund future acquisitions through the
issuance of additional Common Stock, borrowings, including use of amounts
available under its Credit Facility, and cash flow from operations. Capital
expenditures for equipment and expansion of facilities are expected to be funded
from cash flow from operations and supplemented as necessary by borrowings from
the Credit Facility or other sources of financing. To the extent the Company
funds a significant portion of the consideration for future acquisitions with
cash, it may have to increase the amount of the Credit Facility or obtain other
sources of financing. The Company anticipates that its cash flow from operations
will be sufficient to meet the Company's normal working capital and debt service
requirements for at least the next several years. The Company has initiated
discussions with the agent bank to expand its Credit Facility to as much as $300
million.
In July 1997, the Company closed its IPO of 5,900,000 shares of common stock
for which it received net proceeds of approximately $54.9 million, before
payment of estimated offering costs of $4.5 million. Concurrent with the
completion of the IPO, Metals acquired the Founding Companies for $27.8 million
in cash and 10,128,609 shares of common stock. The Company used a portion of the
Credit Facility together with the net proceeds from the IPO to retire
substantially all of the indebtedness of the Founding Companies. Additionally,
on August 12, 1997, the Company sold 885,000 shares of its common stock pursuant
to the overallotment option granted to the underwriters in connection with the
IPO for net proceeds of $8.2 million. The Company used the net proceeds to repay
borrowings on the Credit Facility and for other corporate purposes.
16
<PAGE>
On September 26, 1997, the Company acquired four additional metal processing
companies. These acquisitions include Jeffreys, Meier, Harvey and Federal
Bronze. The acquisition of Jeffreys has been accounted for using the
"pooling-of-interests" method of accounting. The other acquisitions were
accounted for using the "purchase" method of accounting. Collectively, the
Company paid a total of $41.4 million in cash and issued 5,315,946 shares of
common stock in connection with these acquisitions. Additionally, the Company
assumed $21.8 million of existing indebtedness of these companies.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," allows entities to choose between a new fair
value based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). For the
Company, SFAS No. 128 will be effective for the year ended December 31, 1997.
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share ("basic EPS") and diluted earnings per share ("diluted
EPS"). Basic EPS excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. Diluted EPS is computed similarly to
fully diluted earnings per share under current accounting rules. The
implementation of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share as determined under current accounting rules.
17
<PAGE>
METALS USA, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that management considers to be
of a material nature.
ITEM 5. OTHER INFORMATION
On October 29, 1997, the Company and Wayne Steel, Inc. ("Wayne Steel")
announced the signing of a definitive agreement for the acquisition of Wayne
Steel. The acquisition will be accounted for as a "pooling-of interests" and is
expected to close in November, following the receipt of the necessary approvals
from the Federal Trade Commission and completion of other administrative
matters. Wayne Steel is headquartered in Wooster, Ohio, was founded in 1921 by
Meyer Shapiro and operates in Randleman, North Carolina as well as a newly
constructed processing facility scheduled to open in Jeffersonville, Indiana in
late 1997. Wayne Steel is a value-added metals processor of flat rolled steel
providing products and services primarily in the transportation, electrical and
telecommunications equipment manufacturing industries. Wayne Steel had fiscal
1996 and nine months ended September 30, 1997 net sales of $105.8 million and
$100.0 million, respectively, operating income of $6.2 million and $6.7 million,
respectively, and currently has about 220 employees. Mr. Tom Sharpiro, President
and Chief Executive Officer, has been employed by Wayne Steel for 25 years and
intends to sign a five-year employment agreement with Wayne Steel to continue in
that capacity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
27 Financial Data Schedule
99.1 Financial statements of Jeffreys Steel Company, Inc., together with
the report of independent public accountants thereon, is hereby
incorporated by reference to the Post Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1 (Registration
Statement No. 333-35575) filed with the Securities and Exchange
Commission on November 14, 1997.
99.2 Financial statements of Harvey Titanium, Ltd., together with the
report of independent auditors thereon, is hereby incorporated by
reference to the Post Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration Statement No.
333-35575) filed with the Securities and Exchange Commission on
November 14, 1997.
b. REPORTS ON FORM 8-K:
The Company filed a report on Form 8-K dated October 1, 1997, listing
under Item 2 the announcement of the acquisitions of Jeffreys Steel Company,
Inc., Meier Metal Servicenters, Inc., Harvey Titanium, Ltd., and the purchase of
the business of Federal Bronze Products, Inc., on September 26, 1997. The
Company has incorporated by reference into this Form 10-Q the financial
statements of the foregoing, as is required pursuant to the rules and
regulations of the Securities and Exchange Commission.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
METALS USA, INC.
Date: November 14, 1997 By: /s/ J. MICHAEL KIRKSEY
J. Michael Kirksey
Senior Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF METALS USA, INC. AS OF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,949
<SECURITIES> 0
<RECEIVABLES> 88,852
<ALLOWANCES> 0
<INVENTORY> 124,486
<CURRENT-ASSETS> 230,292
<PP&E> 51,420
<DEPRECIATION> 0
<TOTAL-ASSETS> 409,926
<CURRENT-LIABILITIES> 71,716
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 190,664
<TOTAL-LIABILITY-AND-EQUITY> 409,926
<SALES> 195,328
<TOTAL-REVENUES> 195,328
<CGS> 147,632
<TOTAL-COSTS> 192,227
<OTHER-EXPENSES> (315)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,026
<INCOME-PRETAX> 1,390
<INCOME-TAX> 3,104
<INCOME-CONTINUING> (1,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,714)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
</TABLE>
