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, 1998
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 12, 1998: 38,156,407
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................... $ 438.4 $ 186.6 $ 1,094.1 $ 550.7
Operating costs and expenses:
Cost of sales ..................... 329.8 144.1 833.7 425.2
Operating and delivery ............ 44.0 19.4 104.2 57.3
Selling, general and administrative 30.0 11.1 72.8 31.5
Depreciation and amortization ..... 4.9 2.0 11.6 6.3
--------- --------- --------- ---------
Operating income .................... 29.7 10.0 71.8 30.4
Other (income) expense:
Interest expense .................. 9.5 2.0 20.5 5.5
Other (income) expense, net ....... .1 (.5) (1.6) (.6)
--------- --------- --------- ---------
Income before income taxes .......... 20.1 8.5 52.9 25.5
Provision for income taxes .......... 8.2 3.5 21.6 10.7
--------- --------- --------- ---------
Net income .......................... $ 11.9 $ 5.0 $ 31.3 $ 14.8
========= ========= ========= =========
Earnings per share .................. $ .31 $ .16 $ .86 $ .48
========= ========= ========= =========
Earnings per share -- assuming
dilution .......................... $ .31 $ .16 $ .85 $ .47
Number of common shares used in the
per share calculations:
Earnings per share ................ 38.0 31.1 36.2 31.1
========= ========= ========= =========
Earnings per share -- assuming
dilution ........................ 38.5 31.4 36.9 31.5
</TABLE>
The unaudited pro forma combined statements of operations are presented
herein because the Company believes certain investors find the information
useful. This statement should be read in conjunction with the Company's
historical unaudited financial statements and notes thereto included under Part
I, Item 1 of the Form 10-Q for the quarterly reporting period ended September
30, 1998. The preceding schedule differs from the historical results of
operations for the three and nine months ended September 30, 1997 in that it
gives effect to the acquisition of the Founding Companies and the IPO as if they
had occurred on January 1, 1997. All of the other companies acquired are
included in the unaudited pro forma combined statements of operations exactly as
they are in the Company's historical financial statements. The preceding
schedule differs from the historical results of operations for the three and
nine months ended September 30, 1998 in that it excludes a non-recurring,
non-cash charge of $2.6 million attributable to the termination of the Jeffreys'
ESOP in August 1998. The unaudited 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
the dates indicated above and are not necessarily representative of the
Company's results of operations for any future period. Since the companies
acquired were not under common control or management, the unaudited pro forma
combined results for the 1997 periods may not be comparable to, or indicative
of, future performance. Moreover, the results of operations for interim periods
are not necessarily indicative of the results to be expected for the entire
year.
To the extent the former owners of the companies acquired 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
unaudited pro forma combined statements of operations. The foregoing pro forma
adjustments, together with certain other pro forma adjustments, are based on
estimates, available information and certain assumptions, which may be revised
as additional information becomes available. 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 unaudited
pro forma combined financial information of the Company.
(i)
<PAGE>
METALS USA, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1.Financial Statements
Consolidated Balance Sheets of Metals USA, Inc. and Subsidiaries at
September 30, 1998 (Unaudited) and December 31, 1997.................... 2
Unaudited Consolidated Statements of Operations of Metals USA, Inc. and
Subsidiaries for the three and nine months ended September 30, 1998 and
1997.................................................................... 3
Unaudited Consolidated Statements of Cash Flows of Metals USA, Inc. and
Subsidiaries for the nine months ended September 30, 1998 and 1997...... 4
Condensed Notes to Unaudited Consolidated Financial Statements........... 5
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 12
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings................................................... 19
Item 5.Other Information................................................... 19
Item 6.Exhibits and Reports on Form 8-K.................................... 19
Signatures................................................................. 20
1
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 11.0 $ 7.3
Accounts receivable, net of allowance of $7.8 and $3.6 ........... 207.1 95.1
Inventories ...................................................... 347.2 159.4
Prepaid expenses and other ....................................... 9.0 5.6
-------------- --------------
Total current assets ........................................... 574.3 267.4
Property and equipment, net ........................................ 156.2 86.5
Goodwill, net ...................................................... 275.6 120.1
Other assets, net .................................................. 21.3 6.6
-------------- --------------
Total assets ................................................... $ 1,027.4 $ 480.6
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 120.6 $ 52.5
Accrued liabilities .............................................. 28.2 13.1
Current portion of long-term debt ................................ 5.8 7.2
Income taxes payable ............................................. .7 1.6
-------------- --------------
Total current liabilities ...................................... 155.3 74.4
Long-term debt, less current portion ............................... 513.5 167.1
Deferred income tax liability ...................................... 17.7 8.1
Other long-term liabilities ........................................ 9.7 4.5
-------------- --------------
Total liabilities .............................................. 696.2 254.1
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 5,000,000 shares authorized,
none issued and outstanding .................................... -- --
Common stock, $.01 par, 203,122,914 shares authorized,
38,156,407 and 32,680,226 shares issued and
outstanding, respectively ...................................... .4 .3
Additional paid-in capital ....................................... 257.9 184.6
Unearned compensation ............................................ -- (1.5)
Retained earnings ................................................ 72.9 43.1
-------------- --------------
Total stockholders' equity ..................................... 331.2 226.5
-------------- --------------
Total liabilities and stockholders' equity ..................... $ 1,027.4 $ 480.6
============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .............................. $ 438.4 $ 173.5 $ 1,094.1 $ 318.6
Operating costs and expenses:
Cost of sales ........................ 329.8 134.1 833.7 246.6
Operating and delivery ............... 44.0 17.8 104.2 31.7
Selling, general and administrative .. 32.5 10.9 75.3 25.9
Depreciation and amortization ........ 4.9 1.8 11.6 3.2
--------- --------- --------- ---------
Operating income ....................... 27.2 8.9 69.3 11.2
Other (income) expense:
Interest expense ..................... 9.5 1.7 20.5 2.5
Other (income) expense, net .......... .1 (.3) (1.6) (.5)
--------- --------- --------- ---------
Income before income taxes ............. 17.6 7.5 50.4 9.2
Provision for income taxes ............. 7.2 3.3 20.6 6.8
--------- --------- --------- ---------
Net income ............................. $ 10.4 $ 4.2 $ 29.8 $ 2.4
========= ========= ========= =========
Earnings per share .................... $ .27 $ .14 $ .82 $ .13
========= ========= ========= =========
Earnings per share -- assuming
dilution ............................. $ .27 $ .14 $ .81 $ .12
========= ========= ========= =========
Number of common shares used in the
per share calculations:
Earnings per share .................. 38.0 29.1 36.2 19.2
========= ========= ========= =========
Earnings per share -- assuming
dilution ........................... 38.5 29.4 36.9 19.6
RECONCILIATION TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS:
Income before income taxes as shown
above ................................ $ 17.6 $ 7.5 $ 50.4 $ 9.2
Pro forma adjustments:
Jeffreys' ESOP Charge ............... 2.6 -- 2.6 --
Compensation Charge ................. -- -- -- 6.0
Pro forma pre-acquisition income
before income taxes of the Founding
Companies .......................... -- .5 -- 10.2
Other ............................... (.1) .5 (.1) .1
--------- --------- --------- ---------
Unaudited pro forma combined income
before income taxes .................. 20.1 8.5 52.9 25.5
Provision for income taxes ............ 8.2 3.5 21.6 10.7
--------- --------- --------- ---------
Unaudited pro forma combined net
income ............................... $ 11.9 $ 5.0 $ 31.3 $ 14.8
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------
1998 1997
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 29.8 $ 2.4
Adjustments to reconcile net income to net cash (used
in) provided by operating activities --
Provision for bad debts ................................ 1.6 .6
Depreciation and amortization .......................... 11.6 3.2
Amortization of deferred financing costs ............... .7 --
Compensation expense-- management shares ............... -- 6.0
Compensation expense-- ESOP shares ..................... 2.6 --
Deferred income taxes .................................. 1.5 (.1)
Changes in operating assets and liabilities, net of
business acquisitions--
Accounts receivable .................................. (20.1) (7.9)
Inventories .......................................... (49.3) .2
Prepaid expenses and other assets .................... (8.3) 1.7
Accounts payable and accrued liabilities ............. (4.0) 1.4
Income taxes payable ................................. (3.7) 1.1
Other liabilities .................................... 2.2 --
Other .................................................. 1.3 3.5
------ ------
Net cash (used in) provided by operating
activities ........................................ (34.1) 12.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets ............................. .5 .7
Purchases of property and equipment ...................... (16.1) (12.3)
Purchase of businesses, net of acquired cash ............. (184.9) (64.5)
Other .................................................... -- .2
------ ------
Net cash used in investing activities .............. (200.5) (75.9)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock ........................................ .3 58.6
Pre-acquisition distributions to stockholders of
"pooled" companies ....................................... (3.1) (4.7)
Issuance of 8 5/8 % Senior Subordinated Notes ............ 200.0 --
Net borrowings on the Credit Facility .................... 46.0 46.3
Net borrowings (repayments) on Industrial Revenue Bonds
and other long-term debt ............................... 3.1 (23.0)
Deferred financing costs incurred ........................ (7.5) (.8)
Other .................................................... (.5) --
------ ------
Net cash provided by financing activities .......... 238.3 76.4
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 3.7 12.6
CASH AND CASH EQUIVALENTS, beginning of period ............. 7.3 2.4
------ ------
CASH AND CASH EQUIVALENTS, end of period .................. $ 11.0 $ 15.0
====== ======
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Metals USA, Inc., a Delaware corporation, ("Metals USA") was founded in July
1996 to become a leading national value-added metals processor/service center in
the metals processing industry. Prior to its IPO, Metals USA had not conducted
any operations relating to the generation of net sales. Concurrent with the
consummation of the IPO, Metals USA acquired, in separate merger transactions,
eight companies engaged in the processing of steel, aluminum and specialty
metals, as well as the manufacture of metal components. Following the IPO and
through September 30, 1998, Metals USA has acquired numerous additional metal
processing companies and businesses (See Note 5). Metals USA, together with its
wholly-owned subsidiaries, is referred to as the "Company."
BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -- The 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 interim consolidated financial information 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
annual report to stockholders filed with the Securities and Exchange Commission
on Form 10-K ("Form 10-K"). Any capitalized terms used but not specifically
defined herein have the same meaning given to them in the Form 10-K. As
discussed in the following paragraph, during the second quarter of 1998, the
Company completed an acquisition accounted for as a "pooling-of-interests"
transaction. Accordingly, the Company's historical consolidated financial
statements have been restated to reflect the results of operations, cash flows
and financial position of the acquired entity as if the acquisition occurred on
January 1, 1995. The restated financial statements are labeled "Supplemental"
and are contained in the Company's Registration Statement on Form S-4, Amendment
No. 1 (Registration No. 333-49823), filed with the Securities and Exchange
Commission on July 7, 1998.
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS -- During the fourth quarter
of 1997 and the second quarter of 1998, Metals USA completed the acquisition of
all the capital stock of Wayne Steel, Inc. ("Wayne") and Krohn Steel Service
Center, Inc. ("Krohn"), respectively, in business combinations accounted for as
"pooling-of-interests" transactions in accordance with the requirements of APB
No. 16. For the nine months ended September 30, 1998, the pre-acquisition net
sales and net income for Krohn were $13.5 and $.9, respectively.
5
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the restated consolidated net sales, net
income (loss) and per share data of the Company after giving effect to the
acquisitions of Wayne and Krohn:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
----------------------- -----------------------
NET INCOME
NET SALES NET INCOME NET SALES (LOSS)
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales and net income (loss)--
As previously reported in the
Company's Form 10-Q for the
quarterly period ended
September 30, 1997 ......... $ 130.9 $ 2.6 $ 195.3 $ (1.7)
Acquisitions accounted for as
"poolings-of-interests" ... 42.6 1.6 123.3 4.1
--------- ---------- --------- ----------
As restated .............. $ 173.5 $ 4.2 $ 318.6 $ 2.4
========= ========== ========= ==========
Earnings per share --
As previously reported in the
Company's Form 10-Q for the
quarterly period ended
September 30, 1997 ......... $ .11 $ (.12)
Acquisitions accounted for as
"poolings-of-interests" ... .03 .25
---------- ----------
As restated .............. $ .14 $ .13
========== ==========
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-Q for the
quarterly period ended
September 30, 1997 ......... $ .11 $ (.12)
Acquisitions accounted for as
"poolings-of-interests" .... .03 .24
---------- ----------
As restated .............. $ .14 $ .12
========== ==========
</TABLE>
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 (i) the reported amounts of assets
and liabilities, (ii) the disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published and (iii) the
reported amount of net sales and expenses recognized during the periods
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of financial statements. The
accompanying consolidated balance sheets include preliminary allocations of the
respective purchase price paid for the companies acquired using the "purchase"
method of accounting and, accordingly, are subject to final adjustment.
2. EARNINGS PER SHARE
The number of shares of common stock used in the computation of Earnings per
Share excludes the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
The number of shares of common stock used in the computation of Earnings per
Share -- Assuming Dilution reflects the potential dilution that could occur if
securities and other contracts to
6
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
issue common stock were exercised or converted into common stock after taking
into account the methodologies prescribed by SFAS No. 128. In the event the
conversion of common stock equivalents is anti-dilutive, such shares are not
included. The computations result from dividing income available to common
stockholders by the applicable weighted average number of common shares
outstanding during the period.
The number of shares used in the per share calculations consists of the
following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN MILLIONS)
Number of shares used in
computing earnings per
share (weighted-average
shares) ..................... 38.0 29.1 36.2 19.2
Effect of dilutive securities:
Stock options ................ .4 .3 .6 .4
Convertible securities ....... .1 -- .1 --
--------- --------- --------- ---------
Number of shares used in
computing earnings per
share -- assuming dilution .. 38.5 29.4 36.9 19.6
========= ========= ========= =========
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Raw materials --
Structural steel ................................. $ 76.8 $ 8.4
Flat-rolled steel ................................ 84.6 44.8
Specialty metals ................................. 69.5 22.0
Aluminum products ................................ 11.7 17.6
Other ............................................ 5.8 1.7
-------------- --------------
Total raw materials ............................. 248.4 94.5
-------------- --------------
Work-in-process and finished goods--
Structural steel ................................. 56.7 35.8
Flat-rolled steel ................................ 17.5 19.2
Specialty metals ................................. 9.7 5.1
Aluminum products ................................ 15.9 6.7
-------------- --------------
Total work-in-process and finished goods ........ 99.8 66.8
-------------- --------------
Less-- LIFO reserve ................................ (1.0) (1.9)
-------------- --------------
Total ........................................... $ 347.2 $ 159.4
============== ==============
</TABLE>
7
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
Borrowings under the Credit Facility ..... $ 283.5 $ 144.8
8 5/8 % Senior Subordinated Notes ......... 200.0 --
Industrial Revenue Bonds (various issues).. 26.2 21.6
Obligations under capital leases and other 9.6 7.9
------------ ------------
519.3 174.3
Less - Current portion ................... (5.8) (7.2)
------------ ------------
$ 513.5 $ 167.1
============ ============
On February 11, 1998, the Company entered into an amended and restated
five-year revolving Credit Facility which provides for borrowings of up to
$300.0. Additionally, on February 11, 1998, the Company completed the sale of
$200.0 aggregate principal amount of its 8 5/8% Senior Subordinated Notes due
2008 and received $194.5 of net cash proceeds (before expenses of $1.1)
therefrom. The Company used $179.3 of such proceeds to repay the borrowings
outstanding under the Original Credit Facility and Interim Credit Facility.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at redemption rates stated in the indenture
governing the Notes (the "Indenture") together with accrued and unpaid interest
to the date of redemption. Notwithstanding the foregoing, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the Notes originally issued with the net proceeds of one or
more offerings of the common stock of the Company, at a redemption price equal
to 108.625% of the principal amount thereof, plus accrued and unpaid interest to
the date of such redemption, provided that at least 65% of the aggregate
principal amount of Notes originally issued remains outstanding immediately
after such redemption. The Notes are guaranteed by substantially all of the
Company's current and future subsidiaries, and contain certain covenants
restricting additional indebtedness, liens, transactions with affiliates, asset
sales, investments and mergers and acquisitions of subsidiaries. The Notes are
subordinate to borrowings under the Credit Facility and will rank PARI PASSU in
right of payment with all other future subordinated debt of the Company and will
rank senior to other indebtedness that expressly provides that it is
subordinated in right of payment to the Notes.
The Credit Facility matures on February 11, 2003, 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). The weighted
average interest rate for the three and nine months ended September 30, 1998 was
6.8% and 6.7%, respectively. An annual commitment fee of up to .35% is payable
on any unused portion of the Credit Facility. The Credit Facility is used to
fund acquisitions, make capital expenditures, refinance debt of the companies
acquired and for general 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 net worth. In addition, the Company's Credit Facility and the
Indenture include restrictions on the ability of the Company to pay dividends.
Borrowings under the Credit Facility are secured by the pledge of all of the
capital stock of each of the Company's material subsidiaries (as defined).
8
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Pending the completion of the proposed expansion of its Credit Facility, in
September 1998, the Company obtained a $25.0 interim credit facility (the
"Bridge Facility") from the lead bank on its existing Credit Facility. The
Bridge Facility is subject to substantially the same terms and conditions as the
existing Credit Facility. The Company has received commitments from a group of
commercial banks to expand its existing Credit Facility by $50.0 million, to an
aggregate amount of $350.0 million. The Company expects the expansion of the
Credit Facility to be completed by mid-November 1998. The Bridge Facility will
terminate upon the execution of the expanded Credit Facility.
At September 30, 1998, $41.5 was available to the Company under the Credit
Facility and the Bridge Facility. As of November 12, 1998, the Company had
outstanding borrowings of $276.5 and $48.5 available for use under these
facilities.
5. ACQUISITIONS
During the nine months ended September 30, 1998, the Company acquired a
number of additional metal processing companies and businesses, the most
significant of which (those with 1997 annual revenues in excess of $50.0) are as
follows: Independent Metals Co., Inc. ("Independent"), Pacific Metal Company
("Pacific"), The Levinson Steel Company ("Levinson"), Fullerton Industries, Inc.
("Fullerton") and Intsel Southwest Limited Partnership ("Intsel"). With the
exception of Krohn, all of the acquisitions were accounted for using the
"purchase" method of accounting. The aggregate consideration paid by Metals USA
to acquire these companies and businesses was approximately $198.3 in cash,
6,719,091 shares of common stock and the issuance of notes of approximately $3.6
(excluding assumed indebtedness of approximately $93.5).
9
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following summarized unaudited pro forma financial information assumes
the acquisition of the companies acquired through September 30, 1998 and the
issuance of the Notes occurred on January 1, 1997.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
--------- ---------
(UNAUDITED)
Net sales .......................................... $ 1,373.3 $ 1,224.9
Operating costs and expenses:
Cost of sales .................................... 1,040.0 945.2
Operating and delivery ........................... 127.0 110.9
Selling, general and administrative .............. 94.0 83.0
Depreciation and amortization .................... 15.3 15.9
--------- ---------
Operating income ................................... 97.0 69.9
Other (income) expense:
Interest expense ................................. 29.1 27.0
Other income, net ................................ (1.8) (1.7)
--------- ---------
Income before income taxes ......................... 69.7 44.6
Provision for income taxes ......................... 28.5 18.2
--------- ---------
Net income ......................................... $ 41.2 $ 26.4
========= =========
Earnings per share ................................. $ 1.08 $ .69
========= =========
Earnings per share-- assuming dilution ............. $ 1.07 $ .69
========= =========
Number of common shares used in the per share
calculations (in millions):
Earnings per share ............................... 38.1 38.1
========= =========
Earnings per share-- assuming dilution ........... 38.5 38.5
========= =========
The preceding unaudited pro forma amounts reflect the results of operations
for Metals USA, the Founding Companies and the other acquisitions completed
through September 30, 1998, assuming the transactions were completed on January
1, 1997. Additionally, the amounts shown in the table reflect (a) the reduction
in certain related party rental and lease expenses which has been agreed to
prospectively; (b) the reduction in salaries, bonuses and benefits to the owners
of the acquired companies which they have agreed to prospectively and the
reversal of the non-cash Compensation Charge related to the issuance of common
stock to management of and consultants to Metals USA in 1997, partially offset
by a charge for recurring salary expenses of management; (c) the amortization of
goodwill recorded as a result of the acquisition of the companies acquired over
a forty-year estimated life plus additional depreciation expense due to the
allocation of a portion of the excess purchase price to property and equipment;
(d) the assumed reductions in interest expense due to the refinancing of the
outstanding indebtedness in conjunction with the acquisition of the companies
acquired, offset by an assumed increase in interest expense incurred in
connection with financing the acquisitions; (e) the pre-acquisition results of
operations for subsidiaries or affiliates of the Founding Companies which were
acquired by the Founding Companies prior to the related acquisition by Metals
USA, as if those previous acquisitions were completed as of January 1, 1997; (f)
the elimination of historical LIFO adjustments to cost of sales as a result of
the restatement of base year LIFO costs to the appropriate replacement costs as
if the acquisitions occurred on January 1, 1997; (g) certain other nonrecurring
expenses with respect to the companies acquired, such as expenses associated
with compensation plans which were terminated in conjunction with the
acquisitions of their respective companies; (h) the incremental interest expense
and amortization of deferred financing costs incurred as a result of the
issuance
10
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
of the Notes and the Credit Facility, net of the repayment of outstanding
indebtedness of the Company and (i) the incremental provision for federal and
state income taxes for all entities being combined.
6. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ----------
(UNAUDITED)
Supplemental cash flow information:
Cash paid for interest ............................. $ 18.4 $ 2.1
Cash paid for income taxes ......................... 22.4 1.6
Non-cash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired ...................... $509.7 $403.7
Consideration given:
Cash paid ........................................ 198.3 69.2
Stock issued ..................................... 81.5 126.3
Notes issued ..................................... 3.6 --
------ ------
Liabilities assumed ................................ $226.3 $208.2
====== ======
COMPENSATION CHARGES
During the first and second quarters of 1997, the Company sold an aggregate
of 985,500 shares of common stock to management and consultants to the Company
for $.01 per share. As a result, selling, general and administrative expenses
includes the non-recurring, non-cash Compensation Charge of $6.0 for the nine
months ended September 30, 1997, 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.
During the third quarter of 1998, the Company terminated the Jeffreys' ESOP.
As a result, selling, general and administrative expenses includes a
non-recurring, non-cash compensation charge of $2.6 (the "ESOP Charge") for the
three and nine months ended September 30, 1998, representing the fair value of
the shares at the time such shares were allocated to the individual participants
of the plan.
7. COMMITMENTS AND CONTINGENCIES
From time to time, certain subsidiaries of the Company may be involved in a
variety of claims, lawsuits and other disputes arising in the ordinary course of
business. The Company believes the resolution of these matters and the
incurrence of their related costs and expenses should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
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 Form 10-K. Any capitalized terms used but not
defined in this Form 10-Q have the same meaning given to them in the Form 10-K.
RESULTS OF OPERATIONS
The following historical financial information reflects the historical
financial statements of Metals USA restated for the effects of the business
combinations with Jeffreys, Wayne and Krohn accounted for as
"poolings-of-interests" and the remaining acquired companies from their
respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ----------------------------------------
1998 % 1997 % 1998 % 1997 %
-------- -------- -------- ------- -------- ------- -------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........ $ 438.4 100.0% $ 173.5 100.0% $1,094.1 100.0% $ 318.6 100.0%
Cost of sales .. 329.8 75.2% 134.1 77.3% 833.7 76.2% 246.6 77.4%
Operating and
delivery ..... 44.0 10.0% 17.8 10.3% 104.2 9.5% 31.7 9.9%
Selling,
general and
administrative 32.5 7.4% 10.9 6.3% 75.3 6.9% 25.9 8.1%
Depreciation
and
amortization.. 4.9 1.2% 1.8 1.0% 11.6 1.1% 3.2 1.1%
-------- -------- -------- -------- -------- -------- -------- --------
Operating income . 27.2 6.2% 8.9 5.1% 69.3 6.3% 11.2 3.5%
Interest
expense ...... 9.5 2.2% 1.7 1.0% 20.5 1.9% 2.5 .8%
Other (income)
expense, net.. .1 --% (.3) (.2%) (1.6) (.2%) (.5) (.2%)
-------- -------- -------- -------- -------- -------- -------- --------
Income before
income taxes ... $ 17.6 4.0% $ 7.5 4.3% $ 50.4 4.6% 9.2 2.9%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997
NET SALES. Net sales increased $264.9 million, or 152.7%, from $173.5
million for the three months ended September 30, 1997 to $438.4 million for the
three months ended September 30, 1998. The increase in net sales was principally
due to acquisitions. The acquisitions completed during 1997 and the first half
of 1998 accounted for $77.6 million and $133.4 million, respectively, of the
increase. The acquisitions completed in the third quarter of 1998 accounted for
$47.0 million of the increase.
COST OF SALES. Cost of sales increased $195.7 million, or 145.9%, from
$134.1 million for the three months ended September 30, 1997, to $329.8 million
for the three months ended September 30, 1998. The
12
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
increase in cost of sales was principally due to the acquisitions described
above. As a percentage of net sales, cost of sales decreased from 77.3% for the
three months ended September 30, 1997 to 75.2% for the three months ended
September 30, 1998. This percentage decrease was primarily due to lower cost of
raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $26.2
million, or 147.2%, from $17.8 million for the three months ended September 30,
1997 to $44.0 million for the three months ended September 30, 1998. 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 10.3% for the three months ended September 30,
1997 to 10.0% for the three months ended September 30, 1998. 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 $21.6 million, or 198.2%, from $10.9 million for the three
months ended September 30, 1997 to $32.5 million for the three months ended
September 30, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above and, to
a lesser extent, increased volumes of product shipments. Additionally, the
Company recorded a non-recurring, non-cash ESOP Charge of $2.6 million related
to the termination of the Jeffreys' ESOP in August 1998. As a percentage of net
sales, selling, general and administrative expenses increased from 6.3% for the
three months ended September 30, 1997 to 7.4% for the three months ended
September 30, 1998. This percentage increase was primarily due to the ESOP
Charge and, to a lesser extent, increased sales volume.
OPERATING INCOME. Operating income increased $18.3 million, from $8.9
million for the three months ended September 30, 1997 to $27.2 million for the
three months ended September 30, 1998. The increase in operating income was
attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 5.1% for the three months ended September 30,
1997 to 6.2% for the three months ended September 30, 1998. This percentage
increase was primarily due to lower cost of raw materials during the three
months ended September 30, 1998.
INTEREST EXPENSE. Interest expense increased $7.8 million, from $1.7 million
for the three months ended September 30, 1997 to $9.5 million for the three
months ended September 30, 1998. The increase in interest expense was primarily
due to increased borrowings attributable to the debt assumed and the cash
portion of the purchase price paid in connection with the acquisitions completed
by the Company on July 11, 1997 and periods thereafter.
OTHER (INCOME) EXPENSE. Other (income) expense decreased $.4 million, from
income of $.3 million for the three months ended September 30, 1997 to expense
of $.1 million for the three months ended September 30, 1998.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997
NET SALES. Net sales increased $775.5 million, or 243.4%, from $318.6
million for the nine months ended September 30, 1997 to $1,094.1 million for the
nine months ended September 30, 1998. The increase in net sales was principally
due to acquisitions. The acquisitions completed during 1997 and the first half
of 1998 accounted for $422.3 million and $279.6 million, respectively, of the
increase. The acquisitions completed in the third quarter of 1998 accounted for
$47.0 million of the increase.
13
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
COST OF SALES. Cost of sales increased $587.1 million, or 238.1%, from
$246.6 million for the nine months ended September 30, 1997, to $833.7 million
for the nine months ended September 30, 1998. The increase in cost of sales was
principally due to the acquisitions described above. As a percentage of net
sales, cost of sales decreased from 77.4% for the nine months ended September
30, 1997 to 76.2% for the nine months ended September 30, 1998. This percentage
decrease was primarily due to lower cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $72.5
million, or 228.7%, from $31.7 million for the nine months ended September 30,
1997 to $104.2 million for the nine months ended September 30, 1998. 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 9.9% for the nine months ended September 30,
1997 to 9.5% for the nine months ended September 30, 1998. 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 $49.4 million, or 190.7%, from $25.9 million for the nine
months ended September 30, 1997 to $75.3 million for the nine months ended
September 30, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above and, to
a lesser extent, increased volumes of product shipments. As a percentage of net
sales, selling, general and administrative expenses decreased from 8.1% for the
nine months ended September 30, 1997 to 6.9% for the nine months ended September
30, 1998. This percentage decrease was primarily due to the non-recurring,
non-cash Compensation Charge of $6.0 million the Company incurred in connection
with the sale of common stock to consultants and members of management during
the nine months ended September 30, 1997, offset by the non-recurring, non-cash
ESOP Charge of $2.6 million related to the termination of the Jeffreys' ESOP in
August 1998.
OPERATING INCOME. Operating income increased $58.1 million, from $11.2
million for the nine months ended September 30, 1997 to $69.3 million for the
nine months ended September 30, 1998. The increase in operating income was
attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 3.5% for the nine months ended September 30,
1997 to 6.3% for the nine months ended September 30, 1998. This percentage
increase was primarily due to lower cost of raw materials during the nine months
ended September 30, 1998 and, to a lesser extent, the non-recurring, non-cash
charges described above.
INTEREST EXPENSE. Interest expense increased $18.0 million, from $2.5
million for the nine months ended September 30, 1997 to $20.5 million for the
nine months ended September 30, 1998. The increase in interest expense was
primarily due to increased borrowings attributable to the debt assumed and the
cash portion of the purchase price paid in connection with the acquisitions
completed by the Company on July 11, 1997 and periods thereafter.
OTHER (INCOME) EXPENSE. Other income increased $1.1 million, from $.5
million for the nine months ended September 30, 1997 to $1.6 million for the
nine months ended September 30, 1998. The increase in other income was primarily
due to $1.5 million of net proceeds attributable to the breakup fee from the
termination of the Ideal Metal Inc. transaction in April 1998.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the Compensation Charge
and the amortization of goodwill attributable to certain acquisitions.
14
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND FINANCING AND INVESTING ACTIVITIES
The Company used $34.1 million in net cash for operating activities and
generated $12.1 million in net cash from operating activities for the nine
months ended September 30, 1998 and 1997, respectively. Net cash used for
investing activities was $200.5 million and $75.9 million for the nine months
ended September 30, 1998 and 1997, respectively. The principal use of cash
during the nine months ended September 30, 1998 was to fund the cash portion of
the acquisition cost for the acquired companies and the repayment of a portion
of the indebtedness assumed in the acquisitions. Net cash provided by financing
activities was $238.3 million and $76.4 million for the nine months ended
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998, the cash provided by financing activities consisted primarily of the
net proceeds from the sale of the Notes of $193.4 million and net borrowings on
the Credit Facility. At December 31, 1997, the Company had cash of $7.3 million,
working capital of $193.0 million and total debt of $174.3 million. At September
30, 1998, the Company had cash of $11.0 million, working capital of $419.0
million and total debt of $519.3 million. As of November 12, 1998, the Company
had outstanding borrowings under the Credit Facility and the Bridge Facility of
$276.5 million, leaving $48.5 million available for use.
The Company expects to continue to pursue its acquisition program and,
accordingly, will require additional sources of capital to fund a portion of the
future acquisition costs. In this regard, in September 1998, the Company
obtained a $25.0 Bridge Facility from the lead bank on its existing Credit
Facility. The Bridge Facility is subject to substantially the same terms and
conditions as the existing Credit Facility. The Company has received commitments
from a group of commercial banks to expand its existing Credit Facility by $50.0
million, to an aggregate amount of $350.0 million. The Company expects the
expansion of the Credit Facility to be completed by mid-November 1998. The
Bridge Facility will terminate upon the execution of the expanded Credit
Facility. Additionally, the Company is currently exploring a number of
alternatives with commercial banks and other financial advisors for additional
sources of capital for potential acquisition transactions.
The Company anticipates that its cash flow from operations (excluding
acquisition requirements) will be sufficient to meet the Company's normal
working capital and debt service requirements for at least the next several
years. The Company intends to retain all of its earnings to finance the
expansion of its existing business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
common stock for the next several years. In addition, the Company's Credit
Facility and the Indenture include restrictions on the ability of the Company to
pay dividends.
INVESTING ACTIVITIES
Subsequent to December 31, 1997, the Company has acquired a number of metal
processing companies and businesses, the most significant of which (those with
1997 annual revenues in excess of $50.0 million) are as follows: Independent,
Pacific, Levinson, Fullerton and Intsel. The acquisition of Krohn has been
accounted for using the "pooling-of-interests" method of accounting. The
remaining acquisitions were accounted for using the "purchase" method of
accounting. Collectively, the Company paid a total of $198.3 million in cash,
issued 6,719,091 shares of common stock and $3.6 million of notes in connection
with these acquisitions. Additionally, the Company assumed approximately $93.5
million of existing indebtedness of these companies.
The Company intends to continue to pursue acquisition opportunities. The
Company expects to fund future acquisitions through the issuance of additional
common stock, borrowings, including use of amounts available under the 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
15
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, as discussed above.
The Company has an effective Shelf Registration Statement relating to the
issuance of up to 10,000,000 shares of common stock to be issued in connection
with future acquisitions. Approximately 7,231,423 shares are available under
this registration statement for use in connection with future acquisitions.
FINANCING ACTIVITIES
During the first quarter of 1998, the Company completed two significant
financing transactions designed to enhance the Company's liquidity, reduce
incremental interest expense and extend debt maturities. The transactions
included an offering of $200.0 million aggregate principal amount of the
Company's 8 5/8% Senior Subordinated Notes due 2008 and the establishment of a
$300.0 million revolving credit facility with a group of commercial banks. In
September 1998, the Company obtained a $25.0 Bridge Facility from the lead bank
on its existing Credit Facility. The Bridge Facility is subject to substantially
the same terms and conditions as the existing Credit Facility. The Company has
received commitments from a group of commercial banks to expand its existing
Credit Facility by $50.0 million, to an aggregate amount of $350.0 million. The
Company expects the expansion of the Credit Facility to be completed by
mid-November 1998. The Bridge Facility will terminate upon the execution of the
expanded Credit Facility.
Concurrent with the IPO, the Company obtained the Original Credit Facility
which was used to fund acquisitions, refinance certain indebtedness of the
acquired companies and for general corporate and working capital requirements.
In January 1998, the Company obtained a $50.0 Interim Credit Facility to meet
its acquisition related cash requirements pending the completion of an extension
and modification of the Original Credit Facility to provide for up to $300.0
million of borrowing availability. The closing of the amended and restated
Credit Facility on February 11, 1998 stipulated the termination of the Interim
Credit Facility. The Credit Facility matures in February 2003 and will be used
to fund acquisitions, make capital expenditures, refinance debt of the companies
acquired and for general working capital requirements. The Credit Facility
requires the Company to comply with various affirmative and negative covenants
as described in Note 4 to the Condensed Notes to the Unaudited Consolidated
Financial Statements contained elsewhere in this report. Borrowings under the
Credit Facility are secured by the pledge of all of the capital stock of each of
the Company's material subsidiaries.
On February 11, 1998, the Company received $194.5 million of net cash
proceeds (before expenses of $1.1 million) from the sale of the Notes. The Notes
call for semi-annual interest payments on February 15 and August 15 of each
year, beginning August 15, 1998 and mature on February 15, 2008. The Notes are
guaranteed by substantially all of the Company's current and future
subsidiaries, and contain various affirmative and negative covenants as
described in Note 4 to the Condensed Notes to the Unaudited Consolidated
Financial Statements contained elsewhere in this report. The Notes are
subordinate to borrowings under the Credit Facility and will rank PARI PASSU in
right of payment with all other future subordinated debt of the Company and will
rank senior to other indebtedness that expressly provides that it is
subordinated in right of payment to the Notes. The Company used $179.3 million
of such proceeds to repay the borrowings outstanding under the Original Credit
Facility and Interim Credit Facility on February 11, 1998.
TRENDS
The Company expects that domestic steel prices will decline during the
remainder of 1998 and possibly through the first quarter of 1999. The
anticipated decline is principally due to the increased levels of imported
steel. Should domestic steel producers institute "dumping" suits against the
foreign steel importers the expected price declines could be deferred, or fail
to materialize. The increased level of imports is attributable
16
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
to the reduction in consumption resulting from the current economic environment
in Asia, Eastern Europe and South America.
Although the Company's net sales for certain of its subsidiaries are
influenced by steel prices, its results of operations are primarily dependent
upon the volume and mix of value-added services and products provided to its
customers. The Company expects approximately 40% of its net sales to be affected
by the anticipated decline in steel prices. With respect to flat-rolled steel
products, a majority of the net sales are made pursuant to advance pricing
arrangements that range from six to twelve months, which effectively mitigate
the adverse impact of short-term price declines on those products. Additionally,
approximately 30% of the Company's net sales are attributable to aluminum,
titanium and other specialty metals, which have also experienced price
reductions. In general, however, the price reductions for these other metals
have been much less than for steel.
The Company purchases the majority of its raw materials, including steel,
from domestic suppliers, however, the Company has increased its purchases of
steel from foreign suppliers in recent months to take advantage of lower cost
imported steel. Accordingly, for the reasons stated in the preceding paragraph,
together with the diversity of its product mix, customer and industry base, and
a pro active monitoring of its raw material inventories with the goal of
significantly improving its current inventory turnover ratios, the Company does
not expect the anticipated decline in steel prices to have a material effect on
its consolidated results of operations, financial position or liquidity.
YEAR 2000 ISSUE
IMPACT OF YEAR 2000. As the century date occurs, computer programs,
computers and embedded microprocessors controlling equipment with date-sensitive
systems may recognize Year 2000 as 1900 or not at all. This inability to
recognize or properly handle the year 2000 date may result in computer system
failures or miscalculations of critical information as well as failures of
equipment using date-sensitive microprocessors. The Company's various financial
and operational information systems and, in some cases, embedded microprocessors
in certain machinery and equipment that have computer systems and applications
could be affected by the Year 2000 issue.
STATE OF READINESS. In early 1998, the Company formulated a plan to address
the Year 2000 issue. To date, the Company's primary focus has been on its own
internal systems, including all types of systems used by its subsidiaries in
their operations, dealing with the most critical systems first. The Company has
expanded this plan to included third parties and has engaged the assistance of a
"Big 5" accounting firm to help complete this Year 2000 plan.
The Company is nearing completion of an assessment of its own systems,
including embedded microprocessors in certain machinery and equipment.
Currently, the Company is establishing timetables for the renovation of its
information systems, including modifying and upgrading software and developing
and purchasing new software, as necessary. The Company's goal is to complete the
testing and implementation phases by September 30, 1999.
During 1998, the Company began sending questionnaires to its customers,
vendors and other third parties with which the Company has material
relationships and expects to complete the assessment of such parties by the end
of 1998. The Company is unable to estimate the costs that it may incur to remedy
the Year 2000 issues relating to such parties.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company's preliminary estimate is
that the cost of assessment, renovation and implementation of its internal
systems will range from approximately $.2 million to $.4 million, of which
approximately $.1 million has been incurred. These costs will consist primarily
of
17
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
consultants and additional personnel costs. In addition, the Company expects to
incur capital expenditures of approximately $4.0 million for new hardware and
software to integrate and upgrade certain of its existing management information
systems. The Company expects that such costs will be funded through operating
cash flows. These estimates, based on currently available information, will be
updated as the Company continues its assessment and proceeds with renovation,
testing and implementation of its systems. These estimates may be adjusted upon
receipt of more information from the Company's vendors, customers and third
parties and upon design and implementation of the Company's contingency plan. In
addition, the availability and cost of consultants and other personnel trained
in this area could materially affect the estimated costs.
RISKS TO THE COMPANY. Many of the larger operations of the Company have
upgraded their primary operating systems to be Year 2000 compliant; however,
there can be no assurance that the Company will succeed in eliminating all Year
2000 issues. The following disclosure illustrates the Company's "most reasonably
likely, worst-case scenario," given current uncertainties. If the Company's
renovated or replaced information technology systems fail the testing phase, or
any software applications central to the Company's operations are overlooked in
the assessment or implementation phases, the Company could incur higher
administrative costs as a result of having to process financial information,
such as payroll, accounts payable and billings, manually or through alternative
microcomputer systems. If the Company's embedded microprocessors in certain
machinery and equipment are not made Year 2000 compliant, the Company could
experience additional costs by having to outsource certain metal processing for
its customers. If suppliers of commercial infrastructure such as electrical
power, natural gas, telecommunications, rail and marine transportation fail to
provide the Company with such services, the Company may be unable to provide its
normal full complement of services to its customers. If any one or a combination
of the foregoing uncertainties were to occur, the Company's business and
consolidated results of operations, financial condition and liquidity could be
adversely affected.
Furthermore, as a result of the Company's ongoing acquisition program, the
Company's assessment of its Year 2000 issue may change. As such, there can be no
assurance that the systems of newly acquired companies, vendors and other third
party relationships on which the Company's future acquisitions may rely will be
made Year 2000 compliant in a timely manner.
CONTINGENCY PLAN. The Company is developing a comprehensive contingency plan
to address Year 2000 issues with respect to the Company's internal information
technology systems and those of its customers, vendors and other third parties.
The Company's contingency plans will include the use of vendors and other third
parties that are Year 2000 compliant and the use of alternative data processing
systems or temporary manual information systems as necessary. The contingency
plan is expected to be completed and approved by management within the next
three to six months.
18
<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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
21 List of Subsidiaries of the Company
27 Financial Data Schedule
99 Supplemental Consolidated Financial Statements of Metals USA, Inc.
and Subsidiaries, incorporated by reference to the Company's
Registration Statement on Form S-4, Amendment No. 1 (Registration
No. 333-49823) dated July 7, 1998.
B. REPORTS ON FORM 8-K:
On July 10, 1998, the Company filed a Current Report on Form 8-K (under Item
2), dated July 7, 1998, relating to the acquisitions of Intsel and eleven other
companies.
On September 17, 1998, the Company filed a Current Report on Form 8-K/A
(under Item 7), dated July 7, 1998, providing the audited financial statements
and pro forma financial information relating to the acquisition of Intsel.
19
<PAGE>
METALS USA, INC.
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 accounting officer of the Registrant.
METALS USA, INC.
By:\s\ TERRY L. FREEMAN
Terry L. Freeman
Vice President, Corporate Controller
Date: November 13, 1998 and Chief Accounting Officer
20
EXHIBIT 21
METALS USA, INC.
SUBSIDIARY LIST
Aerospace Specifications Metals, Inc.
Affiliated Metals Company
Aluminum Building Systems, Inc.
Concord Metals Corporation
Faitoute Steel Company, Inc.
Federal Bronze Alloys Inc.
Flagg Steel Co.
Forest Manufacturing, Inc.
Fullerton Industries, Inc.
GSBC, Inc. (dba Geneva Steel Blanking)
Harvey Titanium, Ltd.
Independent Metals Co., Inc.
Industrial Metals, Inc.
Interstate Steel Supply Company
Interstate Steel Supply Company of Pittsburgh
Interstate Steel Supply Company of Maryland
Interstate Steel Processing Company
Intsel Southwest Limited Partnership
Jeffreys Steel Company, Inc.
Jeffreys Real Estate Corp.
Krohn Steel Service Center, Inc.
LaserPro, Inc.
The Levinson Steel Company
Mark Metals, Inc.
Meier Metal Servicenters, Inc.
Metalmart, Inc.
Metals USA Management Co., L.P.
Metals USA Finance Corp.
Metals USA Services Corporation
Mulach Steel Corp.
MUSA GP, Inc.
MUSA LP, Inc.
National Manufacturing, Inc.
Pacific Metal Company
Professional Metals, Inc.
Queensboro Steel Corporation
R. J. Fabricating, Inc.
Royal Aluminum, Inc.
Sierra Pacific Steel, Inc.
Southern Alloy of America, Inc.
Steel Manufacturing and Warehouse Company
Steel Service Systems, Inc.
Texas Aluminum Industries, Inc.
Cornerstone Metals Corporation
Cornerstone Building Products, Inc.
Cornerstone Aluminum Company, Inc.
Cornerstone Patio Concepts, L.L.C.
Uni-Steel, Inc.
Valley Aluminum Co.
Wayne Steel, Inc.
Western Awning Company, Inc.
Wilkof-Morris Steel Corporation
Williams Steel & Supply Co., Inc.
WSS Transportation, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,000
<SECURITIES> 0
<RECEIVABLES> 214,900
<ALLOWANCES> (7,800)
<INVENTORY> 347,200
<CURRENT-ASSETS> 574,300
<PP&E> 156,200
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,027,400
<CURRENT-LIABILITIES> 155,300
<BONDS> 519,300
0
0
<COMMON> 400
<OTHER-SE> 330,800
<TOTAL-LIABILITY-AND-EQUITY> 1,027,400
<SALES> 1,094,100
<TOTAL-REVENUES> 1,094,100
<CGS> 833,700
<TOTAL-COSTS> 191,100
<OTHER-EXPENSES> (1,600)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,500
<INCOME-PRETAX> 50,400
<INCOME-TAX> 20,600
<INCOME-CONTINUING> 29,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,800
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
</TABLE>
