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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, 1999
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 November 5, 1999: 38,143,265
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<PAGE>
METALS USA, INC.
INDEX
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1.Financial Statements
Consolidated Balance Sheets of Metals USA, Inc. and Subsidiaries at
September 30, 1999 (Unaudited) and December 31, 1998 .................................... 2
Unaudited Consolidated Statements of Operations of Metals USA, Inc. and
Subsidiaries for the three and nine months ended September 30, 1999 and 1998 ............ 3
Unaudited Consolidated Statements of Cash Flows of Metals USA, Inc. and
Subsidiaries for the nine months ended September 30, 1999 and 1998 ...................... 4
Condensed Notes to Unaudited Consolidated Financial Statements ............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings .................................................................... 21
Item 5.Other Information .................................................................... 21
Item 6.Exhibits and Reports on Form 8-K ..................................................... 21
Signatures .................................................................................. 22
</TABLE>
1
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 8.0 $ 9.3
Accounts receivable, net of allowance of $6.4 and $7.1, respectively .......... 144.8 189.8
Inventories ................................................................... 329.1 343.7
Prepaid expenses and other .................................................... 10.6 16.2
------------ ------------
Total current assets ....................................................... 492.5 559.0
Property and equipment, net of accumulated depreciation of $39.5 and $31.0,
respectively ................................................................. 199.9 173.2
Goodwill, net ..................................................................... 293.4 267.2
Other assets, net ................................................................. 15.8 20.1
------------ ------------
Total assets ............................................................... $ 1,001.6 $ 1,019.5
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 123.4 $ 107.5
Accrued liabilities ........................................................... 42.7 40.1
Current portion of long-term debt ............................................. 3.2 4.0
------------ ------------
Total current liabilities .................................................. 169.3 151.6
Long-term debt, less current portion .............................................. 443.3 502.6
Deferred income tax liability ..................................................... 13.7 15.8
Other long-term liabilities ....................................................... 7.1 7.9
------------ ------------
Total liabilities .......................................................... 633.4 677.9
------------ ------------
Commitments and contingencies ..................................................... -- --
Stockholders' equity:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued ........... -- --
Common stock, $.01 par, 203,122,914 shares authorized, 38,199,132 shares issued .4 .4
Additional paid-in capital .................................................... 261.6 261.2
Retained earnings ............................................................. 109.1 80.0
Treasury stock-- 287,250 shares, at cost ...................................... (2.9) --
------------ ------------
Total stockholders' equity ................................................. 368.2 341.6
------------ ------------
Total liabilities and stockholders' equity ................................. $ 1,001.6 $ 1,019.5
============ ============
</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,
-------- -------- -------- --------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................................... $ 444.0 $ 438.4 $1,302.1 $1,094.1
Operating costs and expenses:
Cost of sales ........................................... 328.1 329.8 967.2 833.7
Operating and delivery .................................. 48.4 44.0 138.5 104.2
Selling, general and administrative ..................... 31.3 32.5 93.5 75.3
Depreciation and amortization ........................... 5.6 4.9 15.6 11.6
Integration charge ...................................... 9.4 -- 9.4 --
-------- -------- -------- --------
Operating income ............................................ 21.2 27.2 77.9 69.3
Other (income) expense:
Interest and securitization expense ..................... 10.2 9.5 29.1 20.5
Other (income) expense, net ............................. (.3) .1 (.5) (1.6)
-------- -------- -------- --------
Income before income taxes .................................. 11.3 17.6 49.3 50.4
Provision for income taxes .................................. 4.7 7.2 20.2 20.6
-------- -------- -------- --------
Net income .................................................. $ 6.6 $ 10.4 $ 29.1 $ 29.8
======== ======== ======== ========
Earnings per share ........................................ $ .17 $ .27 $ .76 $ .82
======== ======== ======== ========
Earnings per share-- assuming dilution .................... $ .17 $ .27 $ .76 $ .81
======== ======== ======== ========
Number of common shares used in the per share calculations:
Earnings per share .................................... 38.1 38.0 38.1 36.2
======== ======== ======== ========
Earnings per share-- assuming dilution ................ 38.6 38.5 38.4 36.9
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................................$ 29.1 $ 29.8
Adjustments to reconcile net income to net cash provided by (used in) operating activities --
Provision for bad debts .................................................................. .8 1.6
Depreciation and amortization ............................................................ 15.6 11.6
Compensation expense-- ESOP shares ....................................................... -- 2.6
Deferred income taxes .................................................................... (2.1) 1.5
Changes in operating assets and liabilities, net of business acquisitions --
Accounts receivable ................................................................... (33.7) (20.1)
Inventories ........................................................................... 30.8 (49.3)
Prepaid expenses and other assets ..................................................... 1.2 (8.3)
Accounts payable and accrued liabilities .............................................. 8.2 (1.8)
Income taxes payable .................................................................. 4.0 (3.7)
Other .................................................................................... .9 2.0
------------- -------------
Net cash provided by (used in) operating activities ................................ 54.8 (34.1)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of acquired cash ................................................ (54.1) (184.9)
Purchases of property and equipment ......................................................... (20.1) (16.1)
Proceeds from securitization of receivables ................................................. 86.0 --
Proceeds from sales of assets ............................................................... 1.6 .5
------------- -------------
Net cash provided by (used in) investing activities ................................ 13.4 (200.5)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on the Credit Facility .......................................... (64.5) 46.0
Issuance of 8 5/8 % Senior Subordinated Notes ............................................... -- 200.0
Net borrowings (repayments) on Industrial Revenue Bonds and other long-term debt ............. (3.0) 3.1
Issuance (repurchases) of common stock ...................................................... (1.8) .3
Deferred financing costs incurred ........................................................... (.5) (7.5)
Pre-acquisition distributions to stockholders of "pooled" companies ......................... -- (3.1)
Other ..................................................................................... .3 (.5)
------------- -------------
Net cash provided by (used in) financing activities ................................ (69.5) 238.3
------------- -------------
NET INCREASE (DECREASE) IN CASH ................................................................. (1.3) 3.7
CASH, beginning of period ....................................................................... 9.3 7.3
------------- -------------
CASH, end of period .............................................................................$ 8.0 $ 11.0
============= =============
</TABLE>
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 and distributor.
Through September 30, 1999, Metals USA has acquired numerous metals processing
and distributing companies. 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.
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 financial statements reflect a non-recurring integration charge of
$9.4 relating to costs the Company expects to incur to consolidate certain
administrative and support functions and combine certain facilities. See Note 8
for additional information. The accompanying consolidated balance sheets include
preliminary allocations of the respective purchase price paid for the companies
acquired during the latest twelve months using the "purchase" method of
accounting and, accordingly, are subject to final adjustment.
PRO FORMA INFORMATION -- The unaudited pro forma information is provided in
the table below because the Company believes certain investors find the
information useful. This reconciliation should be read in conjunction with the
Company's historical unaudited financial statements. The integration charge is
associated with the cost reduction plan announced during the third quarter of
1999. The Jeffreys' ESOP charge is related to termination of that Plan which
occurred in the third quarter of 1998. The breakup fee was for an uncompleted
acquisition during the second quarter of 1998. All of the pro forma adjustments
shown in the table below are of a non-recurring nature.
5
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (as reported) ........................... $ 6.6 $ 10.4 $ 29.1 $ 29.8
Pro forma adjustments, net of provision for income
taxes:
Integration charge ............................ 5.6 -- 5.6 --
Jeffreys' ESOP charge ......................... -- 1.5 -- 1.5
Breakup fee ................................... -- -- -- (.9)
-------------- -------------- --------------- --------------
Pro forma net income ............................... $ 12.2 $ 11.9 $ 34.7 $ 30.4
============== ============== =============== ==============
Pro forma earnings per share --
assuming dilution $ .32 $ .31 $ .90 $ .82
============== ============== =============== ==============
</TABLE>
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 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Number of shares used in computing earnings per share
(weighted-average shares)..................................... 38.1 38.0 38.1 36.2
Effect of dilutive securities:
Stock options ................................................ .2 .4 .1 .6
Convertible securities ....................................... .3 .1 .2 .1
-------------- -------------- -------------- --------------
Number of shares used in computing earnings per share --
assuming dilution............................................. 38.6 38.5 38.4 36.9
-------------- -------------- -------------- --------------
</TABLE>
6
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Raw materials --
Building products ................................. $ 13.3 $ 12.3
Flat rolled ....................................... 79.0 69.4
Heavy carbon ...................................... 118.3 156.3
Specialty metals .................................. 76.3 68.2
--------------- --------------
Total raw materials ............................ 286.9 306.2
--------------- --------------
Work-in-process and finished goods --
Building products ................................. 18.6 16.8
Flat rolled ....................................... 21.1 17.7
Heavy carbon ...................................... .5 .4
Specialty metals .................................. 2.0 3.5
--------------- --------------
Total work-in-process and finished goods ....... 42.2 38.4
--------------- --------------
Less-- LIFO reserve ................................... -- (.9)
--------------- --------------
Total ............................................. $ 329.1 $ 343.7
=============== ==============
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
Credit Facility ........................................ $ 210.0 $ 270.0
8 5/8 % Senior Subordinated Notes ...................... 200.0 200.0
Industrial Revenue Bonds (various issues) .............. 24.4 26.1
Obligations under capital leases and other ............. 12.1 10.5
--------------- --------------
446.5 506.6
Less-- Current portion ................................. (3.2) (4.0)
--------------- --------------
$ 443.3 $ 502.6
=============== ==============
</TABLE>
The Credit Facility matures in February 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 nine months ended September 30, 1999 was 7.0%. An annual
commitment fee is payable on any unused portion of the Credit Facility. The
commitment fee varies between 1/4% and 1/2% per annum based upon the ratio of
funded debt to cash flows (as defined). 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).
7
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At September 30, 1999, $140.0 was available to the Company under the Credit
Facility. As of November 5, 1999, the Company had outstanding borrowings of
$223.0 and $127.0 was available for use under this facility.
The Notes call for semi-annual interest payments on February 15 and August 15
of each year, 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.
5. ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
On January 21, 1999, the Company entered into a three-year agreement (the
"Receivable Securitization Agreement") to sell, on a revolving basis, through
its wholly-owned subsidiary, Metals Receivables Corporation ("MRC"), an
undivided interest in a designated pool of its trade accounts receivable to a
commercial bank ("Purchaser"). The maximum undivided interest in MRC's
receivable portfolio that may be purchased pursuant to this agreement is $100.0.
The Company, as agent for Purchaser, retains collection and administrative
responsibilities for the participating interests sold. As collections reduce the
receivables included in MRC's receivable portfolio, the Company may sell
additional undivided interests in new receivables to MRC. The amount of the
undivided interest in MRC's receivable portfolio that is sold typically will
change monthly depending upon the level of defined eligible receivables
available for sale each month adjusted by certain defined ratios. The
unpurchased portion of the MRC receivable portfolio is a restricted asset and
effectively collateral for the benefit of the Purchaser. At September 30, 1999,
the unpurchased portion of the MRC receivable portfolio was $39.7 and is
included in accounts receivable on the consolidated balance sheet.
The Company recorded $1.3 and $3.4 of expense attributable to the Receivable
Securitization Agreement for the three and nine months ended September 30, 1999,
respectively, which is included in interest and securitization expense on the
unaudited consolidated statements of operations.
6. 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.
7. STOCKHOLDERS' EQUITY
In April 1999, the Board of Directors approved the use of up to $25.0 for the
purchase of the Company's Common Stock. Shares may be purchased in open market
or privately negotiated transactions. During the nine months ended September 30,
1999, the Company repurchased 287,250 shares at an average price of $10.12 per
share.
8
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. INTEGRATION CHARGE
On September 8, 1999, the Company announced a comprehensive plan to reduce
operating costs and improve its operational efficiency by fully integrating
certain operations within a geographic area and consolidating certain
administrative and support functions. The Company recorded a charge to
operations of $9.4 in respect of this plan (the "Integration Charge"). The
principal components of the Integration Charge are $3.3 for termination of
certain employment contracts, $2.1 for severance costs attributable to the
consolidation of administrative and support functions, and $4.0 for the costs of
combining five processing facilities into others within the same geographic
region. These changes will affect less than 5% of the Company's workforce. The
following schedule sets forth the anticipated and incurred costs by segment as
of September 30, 1999.
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999
-------- --------
INTEGRATION COSTS
CHARGE INCURRED
-------- --------
Heavy Carbon .................................... $ 3.0 $ .1
Flat Rolled ..................................... .8 --
Specialty Metals ................................ 3.0 --
Building Products ............................... 2.6 --
-------- --------
Total ......................................... $ 9.4 $ .1
======== ========
The Company expects to incur approximately $1.0 to $2.0 during each of the
next three quarterly reporting periods with respect to the personnel related
costs. Approximately $1.0 of facility integration costs will occur at various
times over the next three quarterly reporting periods. The more significant
facility integration costs, which are primarily attributable to the Heavy Carbon
and Building Products segments of $3.0, are expected to occur in June 2000.
Although the foregoing estimates with respect to both costs and timing reflect
the best information available to management, there can be no assurance that
such costs will not exceed current expectations or that the timing of the
facility integration activities will not be delayed.
9. ACQUISITIONS
During the nine months ended September 30, 1999, the Company acquired
Southwest Steel Supply Company, Premier Steel, Wolf Brothers Steel Service
Center and the net assets of certain other businesses. The aggregate
consideration paid in connection with these acquisitions was $56.9 in cash,
convertible notes of $4.0 and the assumption of indebtedness of $3.5.
10. SEGMENT AND RELATED INFORMATION
The Company has four reportable segments with each segment processing and
distributing distinct products for different customer bases. Each segment is
managed separately by product group teams focused on improving and expanding
each segment's operations. The four operating segments are: Heavy Carbon, Flat
Rolled, Specialty Metals and Building Products.
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 table shows summarized financial information concerning the
Company's reportable segments.
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
CORPORATE
HEAVY FLAT SPECIALTY BUILDING ELIMINATIONS
CARBON ROLLED METALS PRODUCTS AND OTHER TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1999:
Net sales ................... $ 502.9 $ 438.0 $ 295.6 $ 91.6 $ (26.0) $1,302.1
Operating income (loss) ..... 33.7 29.2 12.6 7.5 (5.1) 77.9
Total assets ................ 285.6 237.2 155.2 90.5 233.1 1,001.6
Capital expenditures ........ 9.0 6.3 2.6 2.0 .2 20.1
Depreciation and amortization 5.8 3.0 2.1 1.4 3.3 15.6
1998:
Net sales ................... $ 433.4 $ 323.0 $ 271.3 $ 66.4 $ -- $1,094.1
Operating income (loss) ..... 33.6 18.7 21.0 6.5 (10.5) 69.3
Total assets ................ 372.1 203.4 177.4 80.7 193.8 1,027.4
Capital expenditures ........ 7.3 6.3 1.3 1.1 .1 16.1
Depreciation and amortization 3.8 2.0 1.9 1.0 2.9 11.6
</TABLE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Supplemental cash flow information:
Cash paid for interest ......................................................... $ 32.2 $ 18.4
Cash paid for income taxes ..................................................... 18.3 22.4
Non-cash investing and financing activities:
Restricted cash obtained from Industrial Revenue
Bond financing for construction of capital assets ............................ $ 4.7 $ --
Acquisition of businesses:
Fair value of assets acquired ............................................... $ 72.2 $ 509.7
Consideration given:
Cash paid ................................................................. 56.9 198.3
Stock issued .............................................................. -- 81.5
Notes issued .............................................................. 4.0 3.6
---------------- --------------
Liabilities assumed ......................................................... $ 11.3 $ 226.3
================ ==============
</TABLE>
12. SUBSEQUENT EVENTS
During October 1999, the Company acquired Allmet Building Products, Inc. in
Mesquite, Texas, with annual net sales of $40.0 for total cash consideration of
$9.5, 317,283 shares of common stock and the assumption of indebtedness of $9.2.
10
<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 - SEGMENT
INTEGRATION CHARGE
On September 8, 1999, the Company announced a comprehensive plan to reduce
operating costs and improve its operational efficiency by fully integrating
certain operations within a geographic area and consolidating certain
administrative and support functions. The Company recorded a charge to
operations of $9.4 million in respect of this plan (the "Integration Charge").
The principal components of the Integration Charge are $3.3 million for
termination of certain employment contracts, $2.1 million for severance costs
attributable to the consolidation of administrative and support functions and
$4.0 million for the costs of combining five processing facilities into others
within the same geographic region. These changes will affect less than 5% of the
Company's workforce. The following schedule sets forth the anticipated and
incurred costs by segment as of September 30, 1999.
COSTS INCURRED
---------
THIRD
INTEGRATION QUARTER
CHARGE 1999
--------- ---------
(IN MILLIONS)
Heavy Carbon .............................. $ 3.0 $ .1
Flat Rolled ............................... .8 --
Specialty Metals .......................... 3.0 --
Building Products ......................... 2.6 --
--------- ---------
Total ................................... $ 9.4 $ .1
========= =========
The Company expects to incur approximately $1.0 million to $2.0 million
during each of the next three quarterly reporting periods with respect to the
personnel related costs. Approximately $1.0 million of facility integration
costs will occur at various times over the next three quarterly reporting
periods. The more significant facility integration costs, which are primarily
attributable to the Heavy Carbon and Building Products segments of $3.0 million,
are expected to occur in June 2000. The Company expects to realize annualized
savings of approximately $12.0 million upon completion of the integration plan.
The majority of these savings are expected to be realized by the Heavy Carbon
and Specialty Metals segments. Although the foregoing estimates with respect to
costs, timing and savings reflect the best information available to management,
there can be no assurance that such costs will not exceed current expectations,
that the timing of the facility integration activities will not be delayed, or
that the savings will not be realized as anticipated.
11
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SEGMENT RESULTS -- THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THe
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COST AND INCOME CAPITAL
SALES % EXPENSES % (LOSS) % EXPENDITURES %
---------- ------ ---------- -------- ---------- ------- ---------- -------
1999: (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Heavy Carbon .................... $ 177.6 40.0% $ 168.5 39.9% $ 9.1 42.9% $ 4.3 49.5%
Flat Rolled ..................... 151.0 34.0% 140.9 33.3% 10.1 47.7% 2.3 26.4%
Specialty Metals ................ 94.2 21.2% 93.2 22.0% 1.0 4.7% 1.1 12.6%
Building Products ............... 32.2 7.3% 30.5 7.2% 1.7 8.0% 1.0 11.5%
Corporate, eliminations and other (11.0) (2.5)% (10.3) (2.4)% (0.7) (3.3)% -- --%
---------- ------ ---------- -------- ---------- ------- ---------- -------
Total ........................ $ 444.0 100.0% $ 422.8 100.0% $ 21.2 100.0% $ 8.7 100.0%
========== ====== ========== ======== ========== ======= ========== =======
1998:
Heavy Carbon .................... $ 183.8 42.0% $ 169.5 41.2% $ 14.3 52.5% $ 4.0 50.0%
Flat Rolled ..................... 124.2 28.3% 117.1 28.5% 7.1 26.1% 2.8 34.9%
Specialty Metals ................ 101.3 23.1% 94.4 23.0% 6.9 25.4% 0.7 8.8%
Building Products ............... 29.1 6.6% 26.0 6.3% 3.1 11.4% 0.5 6.3%
Corporate, eliminations and other -- --% 4.2 1.0% (4.2) (15.4)% -- --%
---------- ------ ---------- -------- ---------- ------- ---------- -------
Total ........................ $ 438.4 100.0% $ 411.2 100.0% $ 27.2 100.0% $ 8.0 100.0%
========== ====== ========== ======== ========== ======= ========== =======
</TABLE>
HEAVY CARBON. Net sales decreased $6.2 million, or 3.4%, from $183.8 million
for the three months ended September 30, 1998 to $177.6 million for the three
months ended September 30, 1999. Average realized prices for steel products
decreased 10.4% for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. Material shipments increased 7.9% for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998. Operating costs and expenses decreased $1.0 million, from
$169.5 million for the three months ended September 30, 1998 to $168.5 million
for the three months ended September 30, 1999. Operating costs and expenses as a
percentage of net sales increased from 92.2% for the three months ended
September 30, 1998 to 94.9% for the three months ended September 30, 1999. This
percentage increase was primarily due to lower average realized prices and the
integration charge of $3.0 million. Operating income decreased by $5.2 million,
or 36.4%, from $14.3 million for the three months ended September 30, 1998 to
$9.1 million for the three months ended September 30, 1999. Operating income as
a percentage of net sales decreased from 7.8% for the three months ended
September 30, 1998 to 5.1% for the three months ended September 30, 1999. This
percentage decrease was primarily due to lower average realized prices and the
integration charge, partially offset by higher shipments.
FLAT ROLLED. Net sales increased $26.8 million, or 21.6%, from $124.2 million
for the three months ended September 30, 1998 to $151.0 million for the three
months ended September 30, 1999. Average realized prices for steel products
decreased 6.6% for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. Material shipments increased 30.9% for
the three months ended September 30, 1999 compared to the three months ended
September 30, 1998. The majority of the increased shipments was attributable to
acquisitions completed in 1999. Operating costs and expenses increased $23.8
million, or 20.3%, from $117.1 million for the three months ended September 30,
1998 to $140.9 million for the three months ended September 30, 1999. Operating
costs and expenses as a percentage of net sales decreased from 94.3% for the
three months ended September 30, 1998 to 93.3% for the three months ended
September 30, 1999. This percentage decrease was primarily due to lower cost of
raw material and higher sales. Operating income increased by $3.0 million, or
42.3%, from $7.1 million for the three months ended September 30, 1998 to $10.1
million for the three months ended September 30, 1999. Operating income as a
percentage of net sales increased from 5.7% for the three months ended September
30, 1998 to 6.7% for the three months ended September 30, 1999. This percentage
increase is primarily due to higher shipment volumes and lower costs of raw
material, partially offset by lower average realized sales prices.
12
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SPECIALTY METALS. Net sales decreased $7.1 million, or 7.0%, from $101.3
million for the three months ended September 30, 1998 to $94.2 million for the
three months ended September 30, 1999. Operating costs and expenses decreased
$1.2 million, or 1.3%, from $94.4 million for the three months ended September
30, 1998 to $93.2 million for the three months ended September 30, 1999.
Operating costs and expenses as a percentage of net sales increased from 93.2%
for the three months ended September 30, 1998 to 98.9% for the three months
ended September 30, 1999. This percentage increase was primarily due to the
integration charge of $3.0 million, lower average realized prices and shipments
attributable to aerospace products and lower average realized prices for other
products. Operating income decreased by $5.9 million, or 85.5%, from $6.9
million for the three months ended September 30, 1998 to $1.0 million for the
three months ended September 30, 1999. Operating income as a percentage of net
sales decreased from 6.8% for the three months ended September 30, 1998 to 1.1%
for the three months ended September 30, 1999. This decrease was primarily due
to the integration charge and lower average realized prices and shipments as
described above.
BUILDING PRODUCTS. Net sales increased $3.1 million, or 10.7%, from $29.1
million for the three months ended September 30, 1998 to $32.2 million for the
three months ended September 30, 1999. Operating costs and expenses increased
$4.5 million, or 17.3%, from $26.0 million for the three months ended September
30, 1998 to $30.5 million for the three months ended September 30, 1999. This
increase is primarily due to the costs incurred to support the increased sales
and the integration charge of $2.6 million. Operating costs and expenses as a
percentage of net sales increased from 89.3% for the three months ended
September 30, 1998 to 94.7% for the three months ended September 30, 1999. This
increase is primarily due to the integration charge. Operating income decreased
by $1.4 million, or 45.2%, from $3.1 million for the three months ended
September 30, 1998 to $1.7 million for the three months ended September 30,
1999. This decrease is primarily due to the integration charge partially offset
by higher sales of the Company's Insulated Roof Panels. Operating income as a
percentage of net sales decreased from 10.7% for the three months ended
September 30, 1998 to 5.3% for the three months ended September 30, 1999. This
decrease was primarily due to the integration charge partially offset by
increased sales of the Insulated Roof Panel products.
CORPORATE AND OTHER. This category reflects certain administrative costs and
expenses management has not allocated to its industry segments. The negative net
sales amount represents the elimination of intercompany sales. Operating loss
decreased by $3.5 million, from a loss of $4.2 million for the three months
ended September 30, 1998 to a loss of $.7 million for the three months ended
September 30, 1999. This change is primarily due to the non-recurring, non-cash
ESOP charge of $2.6 million related to the termination of the Jeffreys' ESOP in
August 1998 and the increased cost savings attributable to purchasing of raw
material and lower administrative costs during 1999.
13
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SEGMENT RESULTS -- NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINe
MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COST AND INCOME CAPITAL
SALES % EXPENSES % (LOSS) % EXPENDITURES %
---------- ------ ---------- ------- ---------- ------ ---------- ----------
1999: DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Heavy Carbon .................... $ 502.9 38.7% $ 469.2 38.3% $ 33.7 43.2% $ 9.0 44.8%
Flat Rolled ..................... 438.0 33.6% 408.8 33.4% 29.2 37.5% 6.3 31.3%
Specialty Metals ................ 295.6 22.7% 283.0 23.1% 12.6 16.2% 2.6 12.9%
Building Products ............... 91.6 7.0% 84.1 6.9% 7.5 9.6% 2.0 10.0%
Corporate, eliminations and other (26.0) (2.0)% (20.9) (1.7)% (5.1) (6.5)% .2 1.0%
---------- ------ ---------- ------- ---------- ------ ---------- ----------
Total ........................ $ 1,302.1 100.0% $ 1,224.2 100.0% $ 77.9 100.0% $ 20.1 100.0%
========== ====== ========== ======= ========== ====== ========== ==========
1998:
Heavy Carbon .................... $ 433.4 39.6% $ 399.8 39.1% $ 33.6 48.5% $ 7.3 45.3%
Flat Rolled ..................... 323.0 29.5% 304.3 29.7% 18.7 27.0% 6.3 39.2%
Specialty Metals ................ 271.3 24.8% 250.3 24.4% 21.0 30.3% 1.3 8.1%
Building Products ............... 66.4 6.1% 59.9 5.8% 6.5 9.4% 1.1 6.8%
Corporate, eliminations and other -- --% 10.5 1.0% (10.5) (15.2)% .1 .6%
---------- ------ ---------- ------- ---------- ------ ---------- ----------
Total ........................ $ 1,094.1 100.0% $ 1,024.8 100.0% $ 69.3 100.0% $ 16.1 100.0%
========== ====== ========== ======= ========== ====== ========== ==========
</TABLE>
HEAVY CARBON. Net sales increased $69.5 million, or 16.0%, from $433.4
million for the nine months ended September 30, 1998 to $502.9 million for the
nine months ended September 30, 1999. The net sales attributable to acquisitions
completed during 1998 contributed substantially all of the increase. Average
realized prices for steel products decreased 12.3% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
Material shipments increased 32.3% for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. All of the increase was
attributable to acquisitions. Operating costs and expenses increased $69.4
million, or 17.4%, from $399.8 million for the nine months ended September 30,
1998 to $469.2 million for the nine months ended September 30, 1999. Operating
costs and expenses as a percentage of net sales increased marginally from 92.2%
for the nine months ended September 30, 1998 to 93.3% for the nine months ended
September 30, 1999. This percentage increase was primarily due to lower average
realized prices and the $3.0 million integration charge. Operating income
increased by $.1 million from $33.6 million for the nine months ended September
30, 1998 to $33.7 million for the nine months ended September 30, 1999. This
increase is primarily due to the impact of acquisitions completed during 1998
offset by lower average realized prices and the integration charge. Operating
income as a percentage of net sales decreased from 7.8% for the nine months
ended September 30, 1998 to 6.7% for the nine months ended September 30, 1999.
This percentage decrease was due to lower average realized prices and the
integration charge.
FLAT ROLLED. Net sales increased $115.0 million, or 35.6%, from $323.0
million for the nine months ended September 30, 1998 to $438.0 million for the
nine months ended September 30, 1999. Average realized prices for steel products
decreased 2.4% for the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998. Material shipments increased 39.1% for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998. The majority of the increased shipments was attributable to acquisitions
completed in 1999. Operating costs and expenses increased $104.5 million, or
34.3%, from $304.3 million for the nine months ended September 30, 1998 to
$408.8 million for the nine months ended September 30, 1999. Operating costs and
expenses as a percentage of net sales, decreased from 94.2% for the nine months
ended September 30, 1998 to 93.3% for the nine months ended September 30, 1999.
Operating income increased by $10.5 million, or 56.1%, from $18.7 million for
the nine months ended September 30, 1998 to $29.2 million for the nine months
ended September 30, 1999. This increase was primarily due to acquisitions and
increased shipments. Operating income as a percentage of net sales
14
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
increased from 5.8% for the nine months ended September 30, 1998 to 6.7% for the
nine months ended September 30, 1999. This percentage increase was primarily due
to increased shipments.
SPECIALTY METALS. Net sales increased $24.3 million, or 9.0%, from $271.3
million for the nine months ended September 30, 1998 to $295.6 million for the
nine months ended September 30, 1999. The net sales attributable to acquisitions
completed during 1998 contributed substantially all of the increase. Operating
costs and expenses increased $32.7 million, or 13.1%, from $250.3 million for
the nine months ended September 30, 1998 to $283.0 million for the nine months
ended September 30, 1999. Operating costs and expenses as a percentage of net
sales increased from 92.3% for the nine months ended September 30, 1998 to 95.7%
for the nine months ended September 30, 1999. This percentage increase was
primarily due to lower shipments and average realized prices for aerospace
products and the integration charge of $3.0 million. Operating income decreased
by $8.4 million, or 40.0%, from $21.0 million for the nine months ended
September 30, 1998 to $12.6 million for the nine months ended September 30,
1999. This decrease was primarily due to the decline in the Company's aerospace
business and the integration charge. Operating income as a percentage of net
sales decreased from 7.7% for the nine months ended September 30, 1998 to 4.3%
for the nine months ended September 30, 1999. This percentage decrease was
primarily due to lower average realized prices and shipments for aerospace
products and the integration charge as described above.
BUILDING PRODUCTS. Net sales increased $25.2 million, or 38.0%, from $66.4
million for the nine months ended September 30, 1998 to $91.6 million for the
nine months ended September 30, 1999. The increase in net sales is primarily due
to acquisitions and increased sales of the Company's proprietary Insulated Roof
Panel products by the acquired companies. Operating costs and expenses increased
$24.2 million, or 40.4%, from $59.9 million for the nine months ended September
30, 1998 to $84.1 million for the nine months ended September 30, 1999. This
increase was primarily due to acquisitions and expenses associated with
increased sales of the Insulated Roof Panel products referred to above.
Operating costs and expenses as a percentage of net sales increased from 90.2%
for the nine months ended September 30, 1998 to 91.8% for the nine months ended
September 30, 1999. This increase is primarily due to the integration charge of
$2.6 million. Operating income increased by $1.0 million, or 15.4%, from $6.5
million for the nine months ended September 30, 1998 to $7.5 million for the
nine months ended September 30, 1999. This increase is primarily due to the
acquired companies and higher sales of the Company's Insulated Roof Panels
partially offset by the integration charge. Operating income as a percentage of
net sales decreased from 9.8% for the nine months ended September 30, 1998 to
8.2% for the nine months ended September 30, 1999. This decrease was primarily
due to the integration charge, partially offset by increased sales of the
Insulated Roof Panel products and the current period contributions of the
acquisitions completed during 1998.
CORPORATE AND OTHER. This category reflects certain administrative costs and
expenses management has not allocated to its industry segments. The negative net
sales amount represents the elimination of intercompany sales. Operating loss
decreased by $5.4 million, from a loss of $10.5 million for the nine months
ended September 30, 1998 to a loss of $5.1 million for the nine months ended
September 30, 1999. This change is primarily due to the non-recurring, non-cash
ESOP charge of $2.6 million related to the termination of the Jeffreys' ESOP in
1998 and the increased cost savings attributable to purchasing of raw material
and lower administrative costs during 1999.
15
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - CONSOLIDATED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- --------------------------------------------
1999 % 1998 % 1999 % 1998 %
------------------- ------------------ --------------------- ---------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................... $ 444.0 100.0% $ 438.4 100.0% $ 1,302.1 100.0% $ 1,094.1 100.0%
Cost of sales ..................... 328.1 73.9% 329.8 75.2% 967.2 74.3% 833.7 76.2%
Operating and delivery ............ 48.4 10.9% 44.0 10.0% 138.5 10.6% 104.2 9.5%
Selling, general and administration 31.3 7.0% 32.5 7.4% 93.5 7.2% 75.3 6.9%
Depreciation and amortization ..... 5.6 1.3% 4.9 1.2% 15.6 1.2% 11.6 1.1%
Integration charge ................ 9.4 2.1% -- --% 9.4 .7% -- --%
-------- ----- -------- ----- ---------- ----- ---------- -----
Operating income .................... 21.2 4.8% 27.2 6.2% 77.9 6.0% 69.3 6.3%
Interest and securitization expense 10.2 2.3% 9.5 2.2% 29.1 2.2% 20.5 1.9%
Other (income) expense, net ....... (.3) (.1)% .1 --% (.5) --% (1.6) (.2)%
-------- ----- -------- ----- ---------- ----- ---------- -----
Income before income taxes .......... $ 11.3 2.6% $ 17.6 4.0% $ 49.3 3.8% $ 50.4 4.6%
======== ===== ======== ===== ========== ===== ========== =====
</TABLE>
CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. Net sales increased $5.6 million, or 1.3%, from $438.4 million for
the three months ended September 30, 1998 to $444.0 million for the three months
ended September 30, 1999. This increase is primarily due to increased shipments,
offset by lower average realized prices for most of the Company's products.
COST OF SALES. Cost of sales decreased $1.7 million, from $329.8 million for
the three months ended September 30, 1998, to $328.1 million for the three
months ended September 30, 1999. This decrease is primarily due to lower raw
material costs, partially offset by increased shipments. As a percentage of net
sales, cost of sales decreased from 75.2% for the three months ended September
30, 1998 to 73.9% for the three months ended September 30, 1999. This percentage
decrease was primarily due to lower raw material costs.
OPERATING AND DELIVERY. Operating and delivery expenses increased $4.4
million, or 10.0%, from $44.0 million for the three months ended September 30,
1998 to $48.4 million for the three months ended September 30, 1999. The
increase in operating and delivery expenses was primarily due to increased
shipments for most of the Company's products. As a percentage of net sales,
operating and delivery expenses increased from 10.0% for the three months ended
September 30, 1998 to 10.9% for the three months ended September 30, 1999. This
percentage increase was primarily due to increased shipments at lower average
realized prices for most of the Company's products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $1.2 million, or 3.7%, from $32.5 million for the three
months ended September 30, 1998 to $31.3 million for the three months ended
September 30, 1999. This decrease in selling, general and administrative
expenses was primarily attributable to the 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
decreased from 7.4% for the three months ended September 30, 1998 to 7.0% for
the three months ended September 30, 1999.
INTEGRATION CHARGE. These costs, expected savings and the expected timing of
future expenditures are described in the preceding section "Results of
Operations -- Segments."
OPERATING INCOME. Operating income decreased $6.0 million, or 22.1%, from
$27.2 million for the three months ended September 30, 1998 to $21.2 million for
the three months ended September 30, 1999. This decrease was primarily due to
the Integration Charge partially offset by increased shipments as discussed
above.
16
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
increased $.7 million, or 7.4%, from $9.5 million for the three months ended
September 30, 1998 to $10.2 million for the three months ended September 30,
1999. 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 acquisitions.
OTHER (INCOME) EXPENSE, NET. Other (income) expense decreased $.4 million,
from $.1 million for the three months ended September 30, 1998 to $(.3) million
for the three months ended September 30, 1999.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate primarily due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
CONSOLIDATED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. Net sales increased $208.0 million, or 19.0%, from $1,094.1
million for the nine months ended September 30, 1998 to $1,302.1 million for the
nine months ended September 30, 1999. This increase is primarily due to the
current period contributions of acquisitions and increased shipments, offset by
lower average realized prices for most of the Company's products.
COST OF SALES. Cost of sales increased $133.5 million, or 16.0%, from $833.7
million for the nine months ended September 30, 1998, to $967.2 million for the
nine months ended September 30, 1999. The increase in cost of sales was
primarily due to the acquisitions described above. As a percentage of net sales,
cost of sales decreased from 76.2% for the nine months ended September 30, 1998
to 74.3% for the nine months ended September 30, 1999. This percentage decrease
was primarily due to lower raw material costs.
OPERATING AND DELIVERY. Operating and delivery expenses increased $34.3
million, or 32.9%, from $104.2 million for the nine months ended September 30,
1998 to $138.5 million for the nine months ended September 30, 1999. The
increase in operating and delivery expenses was primarily due to the
acquisitions described above and increased shipments for most of the Company's
products. As a percentage of net sales, operating and delivery expenses
increased from 9.5% for the nine months ended September 30, 1998 to 10.6% for
the nine months ended September 30, 1999. This percentage increase was primarily
due to increased shipments and lower average realized prices for most of the
Company's products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $18.2 million, or 24.2%, from $75.3 million for the nine
months ended September 30, 1998 to $93.5 million for the nine months ended
September 30, 1999. 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 increased from 6.9% for the
nine months ended September 30, 1998 to 7.2% for the nine months ended September
30, 1999. This percentage increase was primarily due to lower average realized
prices for most of the Company's products.
INTEGRATION CHARGE. These costs, expected savings and the expected timing of
future expenditures are described in the preceding section "Results of
Operations -- Segments."
OPERATING INCOME. Operating income increased $8.6 million, or 12.4%, from
$69.3 million for the nine months ended September 30, 1998 to $77.9 million for
the nine months ended September 30, 1999. The increase in operating income was
attributable to acquisitions and the increased shipments for most of the
Company's products, partially offset by the Integration Charge. As a percentage
of net sales, operating income decreased from 6.3% for the nine months ended
September 30, 1998 to 6.0% for the nine months ended September 30, 1999. This
percentage decrease was primarily due to the Integration Charge partially offset
by lower cost of raw materials during the nine months ended September 30, 1999.
17
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
increased $8.6 million, or 42.0%, from $20.5 million for the nine months ended
September 30, 1998 to $29.1 million for the nine months ended September 30,
1999. 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 acquisitions.
OTHER INCOME, NET. Other income decreased by $1.1 million, from $1.6 million
for the nine months ended September 30, 1998 to $.5 million for the nine months
ended September 30, 1999. Other income for the nine months ended September 30,
1998 included a $1.5 million break-up fee for a terminated acquisition.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate primarily due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company generated $54.8 million in net cash from operating activities and
used $34.1 million in net cash for operating activities for the nine months
ended September 30, 1999 and 1998, respectively. Net cash provided by investing
activities was $13.4 million and net cash used for investing activities was
$200.5 million for the nine months ended September 30, 1999 and 1998,
respectively. The cash provided from investing activities during the nine months
ended September 30, 1999 included $86.0 million from the sale of accounts
receivable under the Company's securitization facility offset by cash used for
acquisitions and capital expenditures. Net cash used for financing activities
was $69.5 million and net cash provided by financing activities was $238.3
million for the nine months ended September 30, 1999 and 1998, respectively. For
the nine months ended September 30, 1999, the cash used for financing activities
consisted primarily of the repayment of $64.5 million of borrowings on the
Credit Facility. At September 30, 1999, the Company had cash of $8.0 million,
working capital of $323.2 million and total debt of $446.5 million. At December
31, 1998, the Company had cash of $9.3 million, working capital of $407.4
million and total debt of $506.6 million. The decline in working capital and
total indebtedness is primarily due to the accounts receivable securitization
transaction described below. As of December 31, 1998 and September 30, 1999, the
Company had $80.0 million and $140.0 million of borrowing availability under the
Credit Facility. As of November 5, 1999, the Company had outstanding borrowings
under the Credit Facility of $223.0 million, leaving $127.0 million available
for use. The decrease in borrowing availability under the Credit Facility is
primarily a result of acquisitions completed during October 1999. See Note 12 of
condensed notes to unaudited consolidated financial statements in Part I, Item 1
of this Report.
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 utilize cash flow from operations and borrowings
under the Revolving Credit Facility to finance the expansion of its existing
business, including future acquisitions.
INVESTING ACTIVITIES
During the nine months ended September 30, 1999, the Company acquired
Southwest Steel Supply Company, Premier Steel, Wolf Brothers Steel Service
Center and the net assets of certain other businesses. The aggregate
consideration paid in connection with these acquisitions was approximately $56.9
million in cash, convertible notes of approximately $4.0 million and the
assumption of indebtedness of approximately $3.5 million.
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 funds a significant portion of
the consideration for
18
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. As of November 5, 1999, approximately 6,914,140 shares
are available under this registration statement for use in connection with
future acquisitions.
FINANCING ACTIVITIES
On January 21, 1999, the Company entered into a three-year agreement (the
"Receivable Securitization Agreement") to sell, on a revolving basis, through
its wholly-owned subsidiary, Metals Receivables Corporation ("MRC"), an
undivided interest in a designated pool of its trade accounts receivable to a
commercial bank ("Purchaser"). The maximum undivided interest in MRC's
receivable portfolio that may be purchased pursuant to this agreement is $100.0
million. The Company, as agent for Purchaser, retains collection and
administrative responsibilities for the participating interests sold. As
collections reduce the receivables included in MRC's receivable portfolio, the
Company may sell additional undivided interests in new receivables to MRC. The
amount of the undivided interest in MRC's receivable portfolio that is sold
typically will change monthly depending upon the level of defined eligible
receivables available for sale each month adjusted by certain defined ratios.
The unpurchased portion of the MRC receivable portfolio is a restricted asset
and is effectively collateral for the benefit of the Purchaser. At September 30,
1999, the unpurchased portion of the MRC portfolio is $39.7 million. The Company
used the proceeds from the sale of the receivable portfolio to repay borrowings
on the Credit Facility.
On April 22, 1999, the Company announced that the Board of Directors had
approved the use of up to $25.0 million to repurchase shares of the Company's
stock. The shares may be purchased, from time to time, in open market or in
privately negotiated transactions. During the period ended November 5, 1999, the
Company had repurchased 373,150 shares at an average price of $10.04 per share.
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 to help complete this Year 2000
plan.
The Company has substantially completed an assessment of its own systems,
including embedded microprocessors in certain machinery and equipment. The
Company expects to complete the material portion of its testing and
implementation phases by year end. The Company does not expect that the
unfinished portion relating to these matters will have a material adverse effect
on the Company's results of operations.
During 1998, the Company began sending questionnaires to its customers,
vendors and other third parties with which the Company has material
relationships and has completed the material portion of the assessment of such
parties. The Company does not expect that the unfinished portion relating to
these matters will have a material adverse effect on the Company's results of
operations.
19
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 $.5 million, of which
approximately $.3 million has been incurred as of September 30, 1999. These
costs consist primarily of consultants and additional personnel costs. In
addition, the Company expects to incur capital expenditures of approximately
$6.0 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 by year end.
20
<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
Arthur L. French, Chairman of the Board, President and Chief Executive
Officer, resigned from the Company, effective October 27, 1999. Arnold W.
Bradburd has succeeded him as Chairman of the Board and J. Michael Kirksey was
named President and Chief Executive Officer. Additionally, William B. Edge
resigned as a director on September 1, 1999 and Michael E. Christopher resigned
as a director on September 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
21 Principal Subsidiaries of the Company
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
21
<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.
Date: November 15, 1999 By: \S\ TERRY L. FREEMAN
Terry L. Freeman
Vice President, Corporate Controller
and Chief Accounting Officer
22
EXHIBIT 21
METALS USA, INC.
PRINCIPAL SUBSIDIARIES
Affiliated Metals Company
Allmet Building Products. Inc.
Fullerton Industries, Inc.
GSBC, Inc. (dba Geneva Steel Blanking)
Harvey Titanium, Ltd.
Independent Metals Co.
Interstate Steel Supply Company
Intsel Steel
Jeffreys Steel Company, Inc.
Krohn Steel Service Center, Inc.
The Levinson Steel Company
Meier Metal Servicenters, Inc.
Metals USA Management Co., L.P.
Metals USA Services Corporation
Metals Receivables Corporation
Metals USA Finance Corporation
Pacific Metal Company
Professional Metals, Inc.
Queensboro Steel Corporation
Steel Manufacturing and Warehouse Company
Steel Service Systems, Inc.
Texas Aluminum Industries, Inc.
Uni-Steel, Inc.
Valley Aluminum Co.
Wayne Steel, Inc.
Williams Steel & Supply Co., Inc.
Wolf Brothers Steel Service Center, 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, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,000
<SECURITIES> 0
<RECEIVABLES> 151,200
<ALLOWANCES> (6,400)
<INVENTORY> 329,100
<CURRENT-ASSETS> 492,500
<PP&E> 239,400
<DEPRECIATION> (39,500)
<TOTAL-ASSETS> 1,001,600
<CURRENT-LIABILITIES> 169,300
<BONDS> 0
0
0
<COMMON> 400
<OTHER-SE> 367,800
<TOTAL-LIABILITY-AND-EQUITY> 1,001,600
<SALES> 1,302,100
<TOTAL-REVENUES> 1,302,100
<CGS> 967,200
<TOTAL-COSTS> 257,000
<OTHER-EXPENSES> (500)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,100
<INCOME-PRETAX> 49,300
<INCOME-TAX> 20,200
<INCOME-CONTINUING> 29,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,100
<EPS-BASIC> .76
<EPS-DILUTED> .76
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