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 March 31, 1998
Commission File Number 1-13123
METALS USA, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0533626
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
THREE RIVERWAY, SUITE 600
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (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 May 14, 1998: 35,412,438
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
Net sales ................................................. $ 270.5 $ 170.5
Operating costs and expenses:
Cost of sales ........................................... 208.1 131.1
Operating and delivery .................................. 25.6 18.2
Selling, general and administrative ..................... 17.7 10.0
Depreciation and amortization ........................... 3.0 2.2
-------- --------
Operating income .......................................... 16.1 9.0
Other (income) expense:
Interest expense ........................................ 4.8 1.6
Other income ............................................ -- (.1)
-------- --------
Income before income taxes ................................ 11.3 7.5
Provision for income taxes ................................ 4.6 3.2
-------- --------
Net income ................................................ $ 6.7 $ 4.3
======== ========
Earnings per share ........................................ $ .21 $ .14
======== ========
Earnings per share-- assuming dilution .................... $ .20 $ .14
======== ========
Number of common shares used in the per share calculations:
Earnings per share ...................................... 32.5 29.9
======== ========
Earnings per share-- assuming dilution .................. 33.3 29.9
======== ========
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 March 31,
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 those dates 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, historical consolidated results may not be comparable to, or
indicative of, future performance.
The preceding schedule differs from the historical results of operations for
the three months ended March 31, 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.
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 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
March 31, 1998 (Unaudited) and December 31, 1997.................... 2
Unaudited Consolidated Statements of Operations of Metals USA, Inc.
and Subsidiaries for the three months ended March 31, 1998 and 1997. 3
Unaudited Consolidated Statements of Cash Flows of Metals USA, Inc.
and Subsidiaries for the three months ended March 31, 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................................................. 16
Item 5.Other Information................................................. 16
Item 6.Exhibits and Reports on Form 8-K.................................. 16
Signatures............................................................... 17
1
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................. $ 11.9 $ 7.3
Accounts receivable, net of allowance of $4.8 and $3.6 .......... 144.4 91.4
Inventories ...................................................... 219.3 153.8
Prepaid expenses ................................................. 2.5 1.8
Deferred income tax asset ........................................ 2.7 1.4
Other ............................................................ 2.4 2.2
------------ ------------
Total current assets ........................................... 383.2 257.9
Property and equipment, net ........................................ 103.3 82.5
Goodwill, net ...................................................... 156.8 120.1
Other assets, net .................................................. 13.3 6.5
------------ ------------
Total assets ................................................... $ 656.6 $ 467.0
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 80.2 $ 50.9
Accrued liabilities .............................................. 18.5 12.9
Current portion of long-term debt ................................ 6.5 5.9
Income taxes payable ............................................. 3.4 1.6
------------ ------------
Total current liabilities ...................................... 108.6 71.3
Long-term debt, less current portion ............................... 273.2 167.1
Deferred income tax liability ...................................... 7.5 7.0
Other long-term liabilities ........................................ 4.9 4.5
------------ ------------
Total liabilities .............................................. 394.2 249.9
------------ ------------
Commitments and contingencies
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,
34,427,736 and 31,461,924 shares issued and
outstanding, respectively ...................................... .3 .3
Additional paid-in capital ....................................... 222.0 183.2
Unearned compensation ............................................ (1.7) (1.5)
Retained earnings ................................................ 41.8 35.1
------------ ------------
Total stockholders' equity ..................................... 262.4 217.1
------------ ------------
Total liabilities and stockholders' equity ..................... $ 656.6 $ 467.0
============ ============
</TABLE>
The accompanying notes are an integral part
of these 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
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales .................................................. $ 270.5 $ 65.1
Operating costs and expenses:
Cost of sales ............................................ 208.1 49.9
Operating and delivery ................................... 25.6 6.6
Selling, general and administrative ...................... 17.7 6.7
Depreciation and amortization ............................ 3.0 .7
-------- --------
Operating income ........................................... 16.1 1.2
Other (income) expense:
Interest expense ......................................... 4.8 .4
Other income ............................................. -- (.1)
-------- --------
Income before income taxes ................................. 11.3 .9
Provision for income taxes ................................. 4.6 1.6
-------- --------
Net income (loss) .......................................... $ 6.7 $ (.7)
======== ========
Earnings per share ........................................ $ .21 $ (.05)
======== ========
Earnings per share-- assuming dilution .................... $ .20 $ (.05)
======== ========
Number of common shares used in the per share calculations:
Earnings per share ...................................... 32.5 13.0
======== ========
Earnings per share-- assuming dilution .................. 33.3 13.0
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) .......................................... $ 6.7 $ (.7)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities --
Capital contributions attributable to deemed tax
payments of S Corporations ............................. -- .7
Provision for bad debts .................................. .6 --
Depreciation and amortization ............................ 3.0 .7
Deferred financing costs incurred ........................ (7.0) (.1)
Amortization of deferred financing costs ................. .1 --
Compensation expense-- management shares ................. -- 2.8
Changes in operating assets and liabilities, net of
business acquisitions--
Accounts receivable .................................... (21.1) (3.5)
Inventories ............................................ (4.1) (.3)
Prepaid expenses and other assets ...................... (1.9) (1.2)
Accounts payable and accrued liabilities ............... 7.2 5.8
Income taxes payable ................................... 1.2 .7
Other liabilities ...................................... .4 (.6)
Other operating .......................................... (.8) .1
------- -------
Net cash (used in) provided by operating
activities ......................................... (15.7) 4.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets ............................... .3 --
Purchases of property and equipment ........................ (2.9) (1.8)
Purchase of businesses, net of acquired cash ............... (33.8) --
------- -------
Net cash used in investing activities ................ (36.4) (1.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of 8 5/8 % Senior Subordinated Notes .............. 200.0 --
Net repayments on the Credit Facility ...................... (141.7) --
Net repayments on Industrial Revenue Bonds and other
long-term debt ........................................... (1.6) (1.8)
Other financing ............................................ -- (.2)
------- -------
Net cash provided by (used in) financing
activities ........................................ 56.7 (2.0)
------- -------
NET INCREASE IN CASH ......................................... 4.6 .6
CASH, beginning of period .................................... 7.3 1.7
------- -------
CASH, end of period .......................................... $ 11.9 $ 2.3
======= =======
</TABLE>
The accompanying notes are an integral part
of these 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,
to manufacture higher-value components from processed metals and to pursue
aggressively the consolidation of the highly fragmented 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 March 31, 1998,
the Company has acquired numerous additional companies in similar 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"). Certain capitalized terms used herein have the same
meaning given to them in the Form 10-K.
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
revenues 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.
5
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 issue common stock were exercised or converted
into common stock. The computations result from dividing income available to
common stockholders by the applicable weighted average number of common shares
outstanding during the period.
Earnings per Share for the three months ended March 31, 1997, was computed
using 8,230,011 shares (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),
together with the 4,753,414 shares issued in connection with the organization of
Metals USA (which includes shares issued to consultants and management prior to
the IPO). Shares issued to consultants and management prior to the IPO were
considered to be issued and outstanding from the date of inception without
regard to the date such shares were actually issued. Earnings per Share for the
three months ended March 31, 1998 was computed using the shares issued in
connection with the entities acquired subsequent to December 31, 1997 (all of
which were accounted for using the "purchase" method of accounting) by including
such shares in the Earnings per Share computation only from their respective
dates of issuance. Earnings per Share -- Assuming Dilution differs from the
Earnings per Share computation due to the potential dilution that could occur if
options to acquire common stock were exercised or converted into common stock.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1998 1997
------ ------
(UNAUDITED)
Raw materials --
Structural steel ................................. $ 27.2 $ 8.4
Flat-rolled steel ................................ 66.3 39.0
Specialty metals ................................. 43.5 22.0
Aluminum products ................................ 9.6 17.6
Other ............................................ .1 1.9
------ ------
Total raw materials ............................. 146.7 88.9
------ ------
Work-in-process and finished goods--
Structural steel ................................. 32.6 35.8
Flat-rolled steel ................................ 11.0 19.2
Specialty metals ................................. 9.5 5.1
Aluminum products ................................ 21.2 6.7
------ ------
Total work-in-process and finished goods ........ 74.3 66.8
------ ------
Less-- LIFO reserve ................................ (1.7) (1.9)
------ ------
$219.3 $153.8
====== ======
6
<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:
MARCH 31, DECEMBER 31,
1998 1997
------ ------
(UNAUDITED)
8 5/8 % Senior Subordinated Notes .................. $200.0 $ --
Borrowings under the Credit Facility ............... 50.9 144.8
Various issues of Industrial Revenue Bonds ......... 21.5 21.6
Obligations under capital leases and other ......... 7.3 6.6
------ ------
279.7 173.0
Less - Current portion ............................. (6.5) (5.9)
------ ------
$273.2 $167.1
====== ======
The Company entered into an amended and restated five-year revolving Credit
Facility which provides for borrowings of up to $300.0 on February 11, 1998.
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 estimated expenses of $.8)
therefrom. The Company used $179.3 of such proceeds to repay the borrowings
outstanding under the Original Credit Facility and Interim Credit Facility on
February 11, 1998.
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 Company filed a registration
statement with the Securities and Exchange Commission on April 9, 1998, under
cover of Form S-4 (the "Exchange Offer Registration Statement") relating to an
exchange offer for the Notes under the Securities Act of 1933, as amended. The
Company has agreed, for the benefit of all holders of the Notes, that it will
use its best efforts to cause the Exchange Offer Registration Statement declared
effective within 150 days after the issuance of 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). An annual
commitment fee of up to 1/4% is payable on any unused portion of the Credit
Facility. At March 31, 1998, $249.1 was available to the Company under 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
7
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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). As of May 8, 1998, the Company had outstanding borrowings of $79.4 and
$220.6 available for use under the Credit Facility.
5. ACQUISITIONS
During the three months ended March 31, 1998, the Company acquired the
following metal processing companies: Independent Metals Co., Inc.
("Independent"), Pacific Metal Company ("Pacific"), National Manufacturing, Inc.
("National"), Western Awning Company, Inc. ("Western"), Mark Metals, Inc. and
Metalmart, Inc. (collectively "Metalmart"), The Levinson Steel Company
("Levinson"), Concord Metals Corporation ("Concord"), and the assets of Seaboard
Steel and Iron Corporation ("Seaboard"). These acquisitions were accounted for
using the "purchase" method of accounting. The aggregate consideration paid by
Metals to acquire these companies was approximately $40.7 in cash and 2,965,812
shares of common stock (excluding assumed indebtedness of approximately $47.4).
8
<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 Founding Companies, the Subsequent Acquisitions and the
issuance of the Notes occurred on January 1, 1997. The pro forma decrease in
earnings resulting from the issuance of the Notes was approximately $0.02 per
share for both periods presented.
THREE MONTHS ENDED
MARCH 31,
-----------------
1998 1997
------- -------
(UNAUDITED)
Net sales ................................................. $ 315.5 $ 275.2
Operating costs and expenses:
Cost of sales ........................................... 240.5 211.1
Operating and delivery .................................. 29.8 26.6
Selling, general and administrative ..................... 21.6 18.6
Depreciation and amortization ........................... 2.2 2.5
------- -------
Operating income .......................................... 21.4 16.4
Other (income) expense:
Interest expense ........................................ 6.7 5.5
Other ................................................... .3 (.2)
------- -------
Income before income taxes ................................ 14.4 11.1
Provision for income taxes ................................ 5.4 4.4
------- -------
Net income ................................................ $ 9.0 $ 6.7
======= =======
Earnings per share ........................................ $ .26 $ .19
======= =======
Earnings per share-- assuming dilution .................... $ .26 $ .19
======= =======
Number of common shares used in the per share calculations:
Earnings per share ...................................... 34.5 34.5
======= =======
Earnings per share-- assuming dilution .................. 35.2 34.5
======= =======
The preceding unaudited pro forma amounts reflect the results of operations
for Metals USA, the Founding Companies and the other acquisitions completed
through March 31, 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)
a charge eliminating the gains recorded as 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,
9
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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
THREE MONTHS ENDED
MARCH 31,
-----------------
1998 1997
----- -----
(UNAUDITED)
Supplemental cash flow information:
Cash paid for interest ................................. $ 2.6 $ .4
Cash paid for income taxes ............................. 2.8 .2
Non-cash investing and financing activities:
Purchase of businesses for stock ....................... 38.6 --
COMPENSATION CHARGE
During the three months ended March 31, 1997, the Company sold an aggregate
of 309,500 shares of common stock to management and consultants to the Company
for $0.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $2.8 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.
7. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are 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.
8. SUBSEQUENT EVENTS
On March 23, 1998, the Company announced that it agreed to make an offer for
all of the issued and outstanding common shares of Ideal Metal Inc. ("Ideal") at
a cash price of CAN$5.25 per share. Another company made a competing offer and
on April 28, 1998, the Company received the agreed compensatory fee of U.S.$1.7
(CAN$2.5) from Ideal as a result of the competing offer.
Subsequent to March 31, 1998, the Company acquired the following metal
processing companies: Industrial Metals, Inc. ("Industrial"), Sierra Pacific
Steel, Inc. ("Sierra") and Fullerton Industries, Inc. ("Fullerton"). These
acquisitions will be accounted for using the "purchase" method of accounting.
The aggregate consideration paid by the Company to acquire these companies was
approximately $16.5 in cash and 984,702 shares of common stock (excluding
assumed indebtedness of approximately $12.0).
10
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
On April 20, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission under cover of Form S-1 (the "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. The Shelf
Registration Statement was declared effective on April 22, 1998.
On May 4, 1998, the Company and Krohn Steel Service Center, Inc. ("Krohn
Steel") announced the signing of a definitive agreement for the acquisition of
Krohn Steel. This acquisition will be accounted for as a "pooling-of interests;"
however, the closing of the transaction is contingent upon the receipt of the
necessary approvals from the Federal Trade Commission. The Company will not
restate any of its historical financial statements with respect to this
acquisition until such time as the necessary approvals are obtained.
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 Item 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 and Wayne accounted for as "poolings-of-interests"
and the remaining Acquired Companies from their respective acquisition dates.
THREE MONTHS ENDED MARCH 31,
---------------------------------
1998 % 1997 %
------ ------ ------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
Net sales ............................... $270.5 100.0% $ 65.1 100.0%
Cost of sales ......................... 208.1 76.9% 49.9 76.7%
Operating and delivery ................ 25.6 9.5% 6.6 10.1%
Selling, general and administrative ... 17.7 6.5% 6.7 10.3%
Depreciation and amortization ......... 3.0 1.1% .7 1.1%
------ ------ ------ ------
Operating income ........................ 16.1 6.0% 1.2 1.8%
Interest expense ...................... 4.8 1.8% .4 .6%
Other income .......................... -- --% (.1) (.2%)
------ ------ ------ ------
Income before income taxes .............. $ 11.3 4.2% $ .9 1.4%
====== ====== ====== ======
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales increased $205.4 million, or 315.5%, from $65.1 million
for the three months ended March 31, 1997 to $270.5 million for the three months
ended March 31, 1998. The increase in net sales was principally due to
acquisitions completed during 1997. The purchase acquisitions completed in first
quarter of 1998 did not have a significant impact on net sales or results of
operations for the three months ended March 31, 1998.
COST OF SALES. Cost of sales increased $158.2 million, or 317.0%, from $49.9
million for the three months ended March 31, 1997, to $208.1 million for the
three months ended March 31, 1998. 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 76.7% for the three months ended March 31, 1997 to 76.9%
for the three months ended March 31, 1998. This percentage increase was due to
higher cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $19.0
million, or 287.9%, from $6.6 million for the three months ended March 31,
12
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
1997 to $25.6 million for the three months ended March 31, 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 10.1% for the three months ended March 31, 1997 to 9.5% for the
three months ended March 31, 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 $11.0 million, or 164.2%, from $6.7 million for the three
months ended March 31, 1997 to $17.7 million for the three months ended March
31, 1998. 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 10.3% for the three
months ended March 31, 1997 to 6.5% for the three months ended March 31, 1998.
This percentage decrease was primarily due to the non-recurring non-cash
Compensation Charge of $2.8 million the Company incurred in connection with the
sale of common stock to consultants and members of management during the three
months ended March 31, 1997.
OPERATING INCOME. Operating income increased $14.9 million, from $1.2
million for the three months ended March 31, 1997 to $16.1 million for the three
months ended March 31, 1998. The increase in operating income was attributable
to the factors discussed above. As a percentage of net sales, operating income
increased from 1.8% for the three months ended March 31, 1997 to 6.0% for the
three months ended March 31, 1998. This percentage increase was primarily due to
the non-recurring non-cash Compensation Charge described above, partially offset
by higher cost of raw materials during the three months ended March 31, 1998.
INTEREST EXPENSE. Interest expense increased $4.4 million, from $0.4 million
for the three months ended March 31, 1997 to $4.8 million for the three months
ended March 31, 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.
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), the non-deductibility of the Compensation Charge
and the amortization of goodwill attributable to certain acquisitions.
FINANCIAL CONDITION AND FINANCING AND INVESTING ACTIVITIES
The Company used $15.7 million in net cash for operating activities and
generated $4.4 million in net cash from operating activities for the three
months ended March 31, 1998 and 1997, respectively. Net cash used for investing
activities was $36.4 million and $1.8 million for the three months ended March
31, 1998 and 1997, respectively. The principal use of cash during the three
months ended March 31, 1998 was to fund the cash portion of the acquisition cost
for the Subsequent Acquisitions and the repayment of a portion of the
indebtedness assumed in the acquisitions. Net cash provided by financing
activities was $56.7 million and net cash used in financing activities was $2.0
million for the three months ended March 31, 1998 and 1997, respectively. For
the three months ended March 31, 1998, the cash provided by financing activities
consisted primarily of the net proceeds from the sale of the Notes of $193.7
million offset by net repayments on the Credit Facility. At December 31, 1997,
the Company had cash of $7.3 million, working capital of $186.6 million and
total debt of $173.0 million. At March 31, 1998, the Company had cash of $11.9
million, working capital of $274.6 million and total debt of $279.7 million. As
of May 14, 1998, the Company had outstanding borrowings of $78.4 million and
$221.6 million available for use under the Credit Facility.
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
13
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
several years. The Company intends to retain all of its earnings to finance the
expansion of its 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
Following December 31, 1997, the Company acquired the following metal
processing companies: Independent, Pacific, National, Western, Metalmart,
Levinson, Seaboard, Sierra, Industrial, Fullerton and Concord. These
acquisitions were accounted for using the "purchase" method of accounting.
Collectively, the Company paid a total of $57.2 million in cash and issued
3,950,514 shares of common stock in connection with these acquisitions.
Additionally, the Company assumed approximately $59.4 million of existing
indebtedness of these companies.
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 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
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.
On April 20, 1998, the Company filed the 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. The Shelf Registration
Statement was declared effective on April 22, 1998.
On May 4, 1998, the Company and Krohn Steel announced the signing of a
definitive agreement for the acquisition of Krohn Steel. This acquisition will
be accounted for as a "pooling-of interests;" however, the closing of the
transaction is contingent upon the receipt of the necessary approvals from the
Federal Trade Commission.
FINANCING ACTIVITIES
During the three months ended March 31, 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 a private 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.
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.
14
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
On February 11, 1998, the Company received $194.5 million of net cash
proceeds (before estimated expenses of $.8 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.
RECENT DEVELOPMENTS
On March 23, 1998, the Company announced that it agreed to make an offer for
all of the issued and outstanding common shares of Ideal Metal Inc. ("Ideal") at
a cash price of CAN$5.25 per share. On April 16, 1998, Atlas Alloys Inc.
("Atlas"), a wholly-owned subsidiary of Rio Algom Limited, announced an offer
and acceptance by the majority shareholder of Ideal to acquire all of the issued
and outstanding shares of Ideal for CAN$5.75 per share. Under the Atlas
agreement, the majority shareholder has irrevocably deposited its shares, unless
a competing offer is made for Ideal's common shares at a price of CAN$6.25 or
more per share and Atlas does not subsequently increase its offer to match or
exceed such price. On April 17, 1998, the Company announced that it would not
increase its bid for Ideal and on April 28, 1998, received the agreed
compensatory fee of U.S.$1.7 million (CAN$2.5 million) as a result of the
competing offer.
15
<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
Following March 31, 1998, the Company acquired the following metal
processing companies: Industrial, Sierra, and Fullerton. These
acquisitions will be accounted for using the "purchase" method of accounting.
On May 4, 1998, the Company and Krohn Steel announced the signing of a
definitive agreement for the acquisition of Krohn Steel. This acquisition will
be accounted for as a "pooling-of interests;" however, the closing of the
transaction is contingent upon the receipt of the necessary approvals from the
Federal Trade Commission and completion of other administrative matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
21 List of Subsidiaries of the Company
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
On January 13, 1998, the Company filed a Current Report on Form 8-K (under
Item 2), dated January 13, 1998, relating to the acquisitions of Independent and
two other companies.
On March 16, 1998, the Company filed a Current Report on Form 8-K (under
Item 2), dated March 16, 1998, relating to the acquisitions of Pacific and two
other companies.
16
<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: May 15, 1998 By: /S/ J. MICHAEL KIRKSEY
J. Michael Kirksey
Senior Vice President and Chief Financial
Officer
17
EXHIBIT 21
METALS USA, INC.
SUBSIDIARY LIST
Affiliated Metals Company
Concord Metals Corporation
Federal Bronze Alloys Inc.
Fullerton Industries, Inc.
Harvey Titanium, Ltd.
Industrial Metals, Inc.
Independent Metals Co., Inc.
Interstate Steel Supply Company
Interstate Steel Supply Company of Pittsburg
Interstate Steel Supply Company of Maryland
Interstate Steel Processing Company
Jeffreys Steel Company, Inc.
Jeffreys Real Estate Corp.
The Levinson Steel Company
Mark Metals, Inc.
Meier Metal Servicenters, Inc.
Metalmart, Inc.
Metals USA Management Co., L.P.
MUSA GP, Inc.
MUSA LP, Inc.
Metals USA Service Corporation
Metals USA Finance Corp.
National Manufacturing, Inc.
Pacific Metal Company
Queensboro Steel Corporation
Royal Aluminum, Inc.
R.J. Fabricating, Inc.
Sierra Pacific Steel, Inc.
Southern Alloy of America, Inc.
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.
Wayne Steel, Inc.
Western Awning Company, Inc.
Williams Steel & Supply Co., Inc.
WSS Transportation, Inc.
<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
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,900
<SECURITIES> 0
<RECEIVABLES> 144,400
<ALLOWANCES> 0
<INVENTORY> 219,300
<CURRENT-ASSETS> 383,200
<PP&E> 103,300
<DEPRECIATION> 0
<TOTAL-ASSETS> 656,600
<CURRENT-LIABILITIES> 108,600
<BONDS> 0
0
0
<COMMON> 300
<OTHER-SE> 262,100
<TOTAL-LIABILITY-AND-EQUITY> 656,600
<SALES> 270,500
<TOTAL-REVENUES> 270,500
<CGS> 208,100
<TOTAL-COSTS> 254,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,800
<INCOME-PRETAX> 11,300
<INCOME-TAX> 4,600
<INCOME-CONTINUING> 6,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,700
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
</TABLE>
