================================================================================
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 June 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 August 6, 1999: 38,137,773
================================================================================
<PAGE>
METALS USA, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
--------
Item 1. Financial Statements
Consolidated Balance Sheets of Metals USA, Inc. and
Subsidiaries at June 30, 1999 (Unaudited)
and December 31, 1998 ........................................ 2
Unaudited Consolidated Statements of Operations of
Metals USA, Inc. and Subsidiaries for the three
and six months ended June 30, 1999 and 1998 .................. 3
Unaudited Consolidated Statements of Cash Flows of
Metals USA, Inc. and Subsidiaries for the six
months ended June 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 .................... 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk .................................................... 19
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ...... 20
Item 5. Other Information ......................................... 20
Item 6. Exhibits and Reports on Form 8-K .......................... 20
Signatures ......................................................... 21
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................. $ 6.3 $ 9.3
Accounts receivable, net of allowance of $7.2 and $7.1, respectively .. 125.2 189.8
Inventories ........................................................... 314.0 343.7
Prepaid expenses and other ............................................ 13.7 16.2
-------- --------
Total current assets ............................................... 459.2 559.0
Property and equipment, net of accumulated depreciation of $36.3 and $31.0,
respectively .......................................................... 185.5 173.2
Goodwill, net ............................................................. 267.8 267.2
Other assets, net ......................................................... 17.5 20.1
-------- --------
Total assets ....................................................... $ 930.0 $1,019.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 100.8 $ 107.5
Accrued liabilities ................................................... 34.6 40.1
Current portion of long-term debt ..................................... 5.4 4.0
-------- --------
Total current liabilities .......................................... 140.8 151.6
Long-term debt, less current portion ...................................... 403.0 502.6
Deferred income tax liability ............................................. 15.8 15.8
Other long-term liabilities ............................................... 6.4 7.9
-------- --------
Total liabilities .................................................. 566.0 677.9
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 5,000,000 shares authorized,
none issued and outstanding ......................................... -- --
Common stock, $.01 par, 203,122,914 shares authorized,
38,156,404 shares issued ............................................ .4 .4
Additional paid-in capital ............................................ 261.5 261.2
Retained earnings ..................................................... 102.5 80.0
Treasury stock, 41,000 shares, at cost ............................... (.4) --
-------- --------
Total stockholders' equity ......................................... 364.0 341.6
-------- --------
Total liabilities and stockholders' equity ......................... $ 930.0 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ................................................... $ 435.7 $ 377.2 $ 858.1 $ 655.7
Operating costs and expenses:
Cost of sales ........................................... 324.6 289.3 639.1 503.9
Operating and delivery .................................. 45.7 34.2 90.1 60.2
Selling, general and administrative ..................... 31.2 24.7 62.2 42.8
Depreciation and amortization ........................... 5.1 3.7 10.0 6.7
------- ------- ------- -------
Operating income ............................................ 29.1 25.3 56.7 42.1
Other (income) expense:
Interest and securitization expense ..................... 9.3 6.2 18.9 11.0
Other income, net ....................................... (.1) (1.6) (.2) (1.7)
------- ------- ------- -------
Income before income taxes .................................. 19.9 20.7 38.0 32.8
Provision for income taxes .................................. 8.1 8.5 15.5 13.4
------- ------- ------- -------
Net income .................................................. $ 11.8 $ 12.2 $ 22.5 $ 19.4
======= ======= ======= =======
Earnings per share ........................................ $ .31 $ .33 $ .59 $ .55
======= ======= ======= =======
Earnings per share -- assuming dilution .................... $ .31 $ .32 $ .59 $ .54
======= ======= ======= =======
Number of common shares used in the per share calculations:
Earnings per share .................................... 38.1 36.7 38.1 35.2
======= ======= ======= =======
Earnings per share -- assuming dilution ................ 38.4 37.6 38.4 36.0
======= ======= ======= =======
</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>
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 22.5 $ 19.4
Adjustments to reconcile net income to net cash provided by
(used in) operating activities--
Provision for bad debts .................................... 1.1 1.1
Depreciation and amortization .............................. 10.0 6.7
Changes in operating assets and liabilities, net of business
acquisitions --
Accounts receivable ..................................... (22.8) (23.9)
Inventories ............................................. 36.2 (13.9)
Prepaid expenses and other assets ....................... 1.8 (7.7)
Accounts payable and accrued liabilities ................ (16.3) 8.7
Income taxes payable .................................... (.3) (1.7)
Other ...................................................... .7 .4
------ ------
Net cash provided by (used in) operating activities .. 32.9 (10.9)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from securitization of receivables ................... 88.0 --
Purchases of property and equipment ........................... (11.4) (8.1)
Purchase of businesses, net of acquired cash .................. (13.3) (86.0)
Other ......................................................... .8 --
------ ------
Net cash provided by (used in) investing activities .. 64.1 (94.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders ................................. -- (3.1)
Issuance of 8 5/8 % Senior Subordinated Notes ................. -- 200.0
Net repayments on the Credit Facility ......................... (97.5) (75.3)
Net borrowings (repayments) on Industrial Revenue Bonds and
other long-term debt .................................... (1.8) 3.3
Deferred financing costs incurred ............................. (.4) (7.2)
Repurchases of common stock ................................... (.4) --
Other ......................................................... -- (.3)
------ ------
Net cash provided by (used in) financing activities .. (100.1) 117.4
------ ------
NET INCREASE (DECREASE) IN CASH .................................. (3.0) 12.4
CASH, beginning of period ......................................... 9.3 7.3
------ ------
CASH, end of period ............................................... $ 6.3 $ 19.7
====== ======
</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 June 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 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.
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.
5
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The number of shares used in the per share calculations consists of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 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 36.7 38.1 35.2
Effect of dilutive securities:
Stock options ..................................................... .1 .8 .1 .8
Convertible securities ............................................ .2 .1 .2 --
---- ---- ---- ----
Number of shares used in computing earnings per share --
assuming dilution ................................................. 38.4 37.6 38.4 36.0
==== ==== ==== ====
</TABLE>
3. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
Raw materials --
Aluminum building products segment ........... $ 12.3 $ 12.3
Flat rolled segment .......................... 60.8 69.4
Heavy carbon segment ......................... 131.3 156.3
Specialty metals segment ..................... 71.3 68.2
------ ------
Total raw materials ....................... 275.7 306.2
------ ------
Work-in-process and finished goods --
Aluminum building products segment ........... 16.3 16.8
Flat rolled segment .......................... 19.7 17.7
Heavy carbon segment ......................... .4 .4
Specialty metals segment ..................... 1.9 3.5
------ ------
Total work-in-process and finished goods .. 38.3 38.4
------ ------
Less -- LIFO reserve ............................. -- (.9)
------ ------
Total ........................................ $314.0 $343.7
====== ======
4. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
Credit Facility ................................... $172.0 $270.0
8 5/8 % Senior Subordinated Notes ................. 200.0 200.0
Industrial Revenue Bonds (various issues) ......... 25.3 26.1
Obligations under capital leases and other ........ 11.1 10.5
------ ------
408.4 506.6
Less-- Current portion ............................ (5.4) (4.0)
------ ------
$403.0 $502.6
====== ======
6
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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 six months ended June 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).
At June 30, 1999, $178.0 was available to the Company under the Credit
Facility. As of August 6, 1999, the Company had outstanding borrowings of $221.5
and $128.5 was available for use under this facility.
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 Receivable 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. From month to month, the amount by which
MRC's receivable portfolio exceeds the undivided interest purchased will vary.
The Company expects such amount will range between $25.0 and $35.0. The
unpurchased portion of the MRC receivable portfolio is a restricted asset and
effectively collateral for the benefit of the Purchaser. At June 30, 1999, the
unpurchased portion of the MRC receivable portfolio is $30.0 million and is
included in accounts receivable on the consolidated balance sheet.
The Company recorded $1.2 and $2.1 of expense attributable to the Receivable
Securitization Agreement for the three and six months ended June 30, 1999,
respectively, which is included in interest and securitization expense on the
unaudited consolidated statements of operations.
7
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. 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 period ended June 30, 1999, the
Company had repurchased 41,000 shares at an average price of $10.47 per share.
7. ACQUISITIONS
During the first quarter of 1999, the Company acquired the businesses of
Southwest Steel in Madison, Illinois and Premier Steel in Shreveport, Louisiana,
with annual net sales of approximately $50.0 and $15.0, respectively. The
consideration paid in connection with these acquisitions was approximately $13.1
in cash and the assumption of indebtedness of approximately $1.1.
8. 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 Aluminum Building Products.
The following table shows summarized financial information concerning the
Company's reportable segments.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
ALUMINUM CORPORATE,
HEAVY SPECIALTY BUILDING ELIMINATIONS
CARBON FLAT ROLLED METALS PRODUCTS AND OTHER TOTAL
-------- ----------- --------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
1999:
Net sales .................................. $325.3 $287.0 $201.4 $ 59.4 $(15.0) $858.1
Operating income (loss) .................... 24.6 19.1 11.6 5.8 (4.4) 56.7
Total assets ............................... 287.7 178.7 150.5 86.2 226.9 930.0
Capital expenditures ....................... 4.7 4.0 1.5 1.0 .2 11.4
Depreciation and amortization .............. 3.8 1.9 1.4 .9 2.0 10.0
1998:
Net sales .................................. $249.6 $198.8 $170.0 $ 37.3 $ -- $655.7
Operating income (loss) .................... 19.3 11.6 14.1 3.4 (6.3) 42.1
Total assets ............................... 238.3 190.1 166.8 52.1 213.5 860.8
Capital expenditures ....................... 3.3 3.5 .6 .6 .1 8.1
Depreciation and amortization .............. 2.0 1.1 1.2 .4 2.0 6.7
</TABLE>
8
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
------ ------
Supplemental cash flow information:
Cash paid for interest ............................ $ 18.1 $ 4.4
Cash paid for income taxes ........................ 14.1 12.4
Non-cash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired ..................... $ 16.9 $311.3
Consideration given:
Cash paid ....................................... 13.1 93.4
Stock issued .................................... -- 70.7
Notes issued .................................... -- 3.6
------ ------
Liabilities assumed ............................... $ 3.8 $143.6
====== ======
10. COMMITMENTS AND CONTINGENCIES
From time to time, certain subsidiaries of the Company may be involved in a
variety of claims, lawsuits and other disputes arising in the ordinary course of
business. The Company believes the resolution of these matters and the
incurrence of their related costs and expenses should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
11. SUBSEQUENT EVENTS
During July 1999, the Company acquired Wolf Brothers Steel Service Center in
Philadelphia, Pennsylvania, with annual net sales of approximately $60.0, and
the net assets of certain other businesses, for total cash consideration of
approximately $42.8, convertible notes of approximately $4.0 and the assumption
of indebtedness of approximately $3.4.
9
<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
SEGMENT RESULTS -- THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREe
MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COSTS AND INCOME CAPITAL
SALES % EXPENSES % (LOSS) % EXPENDITURES %
------- ------- ----------- --------- --------- ------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
Heavy Carbon ........................ $165.5 38.0% $155.1 38.1% $ 10.4 35.7% $ 1.5 29.4%
Flat Rolled ......................... 148.6 34.1% 137.3 33.8% 11.3 38.8% 1.9 37.2%
Specialty Metals .................... 97.2 22.3% 92.0 22.6% 5.2 17.9% 1.0 19.6%
Aluminum Building Products .......... 33.4 7.7% 28.9 7.1% 4.5 15.5% .6 11.8%
Corporate, eliminations and other ... (9.0) (2.1)% (6.7) (1.6)% (2.3) (7.9)% .1 2.0%
------ ------ ------ ------ ------ ------ ------ ------
Total ............................ $435.7 100.0% $406.6 100.0% $ 29.1 100.0% $ 5.1 100.0%
====== ====== ====== ====== ====== ====== ====== ======
1998:
Heavy Carbon ........................ $146.7 39.0% $134.6 38.2% $ 12.1 47.8% $ 2.0 38.5%
Flat Rolled ......................... 111.0 29.4% 104.4 29.7% 6.6 26.1% 2.4 46.1%
Specialty Metals .................... 97.5 25.8% 89.3 25.4% 8.2 32.4% .4 7.7%
Aluminum Building Products .......... 22.0 5.8% 19.4 5.5% 2.6 10.3% .4 7.7%
Corporate, eliminations and other ... -- .0% 4.2 1.2% (4.2) (16.6)% -- .0%
------ ------ ------ ------ ------ ------ ------ ------
Total ............................ $377.2 100.0% $351.9 100.0% $ 25.3 100.0% $ 5.2 100.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
HEAVY CARBON. Net sales increased $18.8 million, or 12.8%, from $146.7
million for the three months ended June 30, 1998 to $165.5 million for the three
months ended June 30, 1999. Average realized prices for steel products decreased
approximately 15.6% for the three months ended June 30, 1999 compared to the
three months ended June 30, 1998. Material shipments increased 33.8% for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998. Net sales on a "same store" basis decreased by 12.5%, primarily due to
lower average realized prices as the Company attempted to maintain its normal
product margins at the expense of lower margin business. Operating costs and
expenses increased $20.5 million, or 15.2%, from $134.6 million for the three
months ended June 30, 1998 to $155.1 million for the three months ended June 30,
1999. Operating costs and expenses as a percentage of net sales increased from
91.8% for the three months ended June 30, 1998 to 93.7% for the three months
ended June 30, 1999. This percentage increase was primarily due to lower average
realized prices. Operating income decreased by $1.7 million, or 14.0%, from
$12.1 million for the three months ended June 30, 1998 to $10.4 million for the
three months ended June 30, 1999. Operating income as a percentage of net sales
decreased from 8.2% for the three months
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ended June 30, 1998 to 6.3% for the three months ended June 30, 1999. This
percentage decrease was primarily due to lower average realized prices,
partially offset by higher shipments.
FLAT ROLLED. Net sales increased $37.6 million, or 33.9%, from $111.0 million
for the three months ended June 30, 1998 to $148.6 million for the three months
ended June 30, 1999. Average realized prices for steel products decreased
approximately 4.4% for the three months ended June 30, 1999 compared to the
three months ended June 30, 1998. Material shipments increased 39.5% for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998. Net sales on a "same store" basis increased by 15.2%, due primarily to a
20.7% increase in shipments, partially offset by lower average realized prices.
Operating costs and expenses increased $32.9 million, or 31.5%, from $104.4
million for the three months ended June 30, 1998 to $137.3 million for the three
months ended June 30, 1999. Operating costs and expenses as a percentage of net
sales, decreased from 94.1% for the three months ended June 30, 1998 to 92.4%
for the three months ended June 30, 1999. This percentage decrease was primarily
due to lower cost of raw material and higher sales. Operating income increased
by $4.7 million, or 71.2%, from $6.6 million for the three months ended June 30,
1998 to $11.3 million for the three months ended June 30, 1999. Operating income
as a percentage of net sales increased from 5.9% for the three months ended June
30, 1998 to 7.6% for the three months ended June 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.
SPECIALTY METALS. Net sales decreased $.3 million, or .3%, from $97.5 million
for the three months ended June 30, 1998 to $97.2 million for the three months
ended June 30, 1999. Net sales on a "same store" basis decreased 14.4%, due
primarily to decreased shipments and lower average realized prices for aerospace
products. Operating costs and expenses increased $2.7 million, or 3.0%, from
$89.3 million for the three months ended June 30, 1998 to $92.0 million for the
three months ended June 30, 1999. Operating costs and expenses as a percentage
of net sales increased from 91.6% for the three months ended June 30, 1998 to
94.7% for the three months ended June 30, 1999. This percentage increase was
primarily due to lower average realized prices and shipments primarily
attributable to aerospace products. Operating income decreased by $3.0 million,
or 36.6%, from $8.2 million for the three months ended June 30, 1998 to $5.2
million for the three months ended June 30, 1999. Operating income as a
percentage of net sales decreased from 8.4% for the three months ended June 30,
1998 to 5.3% for the three months ended June 30, 1999. This decrease was
primarily due to lower average realized prices and shipments as described above.
ALUMINUM BUILDING PRODUCTS. Net sales increased $11.4 million, or 51.8%, from
$22.0 million for the three months ended June 30, 1998 to $33.4 million for the
three months ended June 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
$9.5 million, or 49.0%, from $19.4 million for the three months ended June 30,
1998 to $28.9 million for the three months ended June 30, 1999. This increase is
primarily due to the acquisitions and increased sales of the Insulated Roof
Panel products referred to above. Operating costs and expenses as a percentage
of net sales decreased from 88.2% for the three months ended June 30, 1998 to
86.5% for the three months ended June 30, 1999. This decrease is primarily due
to lower administrative costs and lower manufacturing costs attributable to the
expanded distribution of the Company's Insulated Roof Panel products. Operating
income increased by $1.9 million, or 73.1%, from $2.6 million for the three
months ended June 30, 1998 to $4.5 million for the three months ended June 30,
1999. This increase is primarily due to the acquired companies and higher sales
of the Company's Insulated Roof Panels. Operating income as a percentage of net
sales increased from 11.8% for the three months ended June 30, 1998 to 13.5% for
the three months ended June 30, 1999. This increase was primarily due to
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 $1.9 million, from a loss of $4.2 million for the three months
ended June 30, 1998 to a loss of $2.3 million for the three months ended June
30, 1999. This change is primarily due to increased cost savings attributable to
purchasing of raw material and lower administrative costs.
11
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT RESULTS -- SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COSTS AND INCOME CAPITAL
SALES % EXPENSES % (LOSS) % EXPENDITURES %
------- ------- ----------- ------- ---------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999: (DOLLARS IN MILLIONS)
Heavy Carbon ....................... $325.3 37.9% $300.7 37.5% $ 24.6 43.4% $ 4.7 41.1%
Flat Rolled ........................ 287.0 33.4% 267.9 33.4% 19.1 33.7% 4.0 35.1%
Specialty Metals ................... 201.4 23.5% 189.8 23.7% 11.6 20.5% 1.5 13.2%
Aluminum Building Products ......... 59.4 6.9% 53.6 6.7% 5.8 10.2% 1.0 8.8%
Corporate, eliminations and other .. (15.0) (1.7)% (10.6) (1.3)% (4.4) (7.8)% .2 1.8%
------ ------ ------ ------ ------ ------ ------ ------
Total ........................... $858.1 100.0% $801.4 100.0% $ 56.7 100.0% $ 11.4 100.0%
====== ====== ====== ====== ====== ====== ====== ======
1998:
Heavy Carbon ....................... $249.6 38.1% $230.3 37.5% $ 19.3 45.8% $ 3.3 40.7%
Flat Rolled ........................ 198.8 30.3% 187.2 30.6% 11.6 27.6% 3.5 43.3%
Specialty Metals ................... 170.0 25.9% 155.9 25.4% 14.1 33.5% .6 7.4%
Aluminum Building Products ......... 37.3 5.7% 33.9 5.5% 3.4 8.1% .6 7.4%
Corporate, eliminations and other .. -- -- 6.3 1.0% (6.3) (15.0)% .1 1.2%
------ ------ ------ ------ ------ ------ ------ ------
Total ........................... $655.7 100.0% $613.6 100.0% $ 42.1 100.0% $ 8.1 100.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
HEAVY CARBON. Net sales increased $75.7 million, or 30.3%, from $249.6
million for the six months ended June 30, 1998 to $325.3 million for the six
months ended June 30, 1999. The net sales attributable to acquisitions completed
during 1998 contributed substantially all of the increase. Average realized
prices for steel products decreased approximately 13.7% for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. Material shipments
increased 51.1% for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. Net sales on a "same store" basis decreased by
10.8%, primarily due to lower average realized prices, as the Company attempted
to maintain its normal product margins at the expense of lower margin business.
Operating costs and expenses increased $70.4 million, or 30.6%, from $230.3
million for the six months ended June 30, 1998 to $300.7 million for the six
months ended June 30, 1999. Operating costs and expenses as a percentage of net
sales increased marginally from 92.3% for the six months ended June 30, 1998 to
92.4% for the six months ended June 30, 1999. This percentage increase was
primarily due to lower average realized prices. Operating income increased by
$5.3 million, or 27.5%, from $19.3 million for the six months ended June 30,
1998 to $24.6 million for the six months ended June 30, 1999. This increase is
primarily due to the impact of acquisitions completed during 1998. Operating
income as a percentage of net sales decreased marginally from 7.7% for the six
months ended June 30, 1998 to 7.6% for the six months ended June 30, 1999. This
percentage decrease was due to lower average realized prices.
FLAT ROLLED. Net sales increased $88.2 million, or 44.4%, from $198.8 million
for the six months ended June 30, 1998 to $287.0 million for the six months
ended June 30, 1999. Average realized prices for steel products increased
approximately .2% for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998. Material shipments increased 43.8% for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998. Net
sales on a "same store" basis increased by 21.3%, due primarily to increased
shipments. Operating costs and expenses increased $80.7 million, or 43.1%, from
$187.2 million for the six months ended June 30, 1998 to $267.9 million for the
six months ended June 30, 1999. Operating costs and expenses as a percentage of
net sales, decreased from 94.2% for the six months ended June 30, 1998 to 93.3%
for the six months ended June 30, 1999. Operating income increased by $7.5
million, or 64.7%, from $11.6 million for the six months ended June 30, 1998 to
$19.1 million for the six months ended June 30, 1999. This increase is primarily
due to increased shipments. Operating income as a percentage of net sales
increased from 5.8% for the six months ended June 30, 1998 to 6.7% for the six
months ended June 30, 1999. This percentage increase was primarily due to
increased shipments.
12
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SPECIALTY METALS. Net sales increased $31.4 million, or 18.5%, from $170.0
million for the six months ended June 30, 1998 to $201.4 million for the six
months ended June 30, 1999. The net sales attributable to acquisitions completed
during 1998 contributed substantially all of the increase. Net sales on a "same
store" basis decreased 7.7%, due primarily to decreased shipments and lower
average realized prices for aerospace products. Operating costs and expenses
increased $33.9 million, or 21.7%, from $155.9 million for the six months ended
June 30, 1998 to $189.8 million for the six months ended June 30, 1999.
Operating costs and expenses as a percentage of net sales increased from 91.7%
for the six months ended June 30, 1998 to 94.2% for the six months ended June
30, 1999. This percentage increase was primarily due to lower shipments and
average realized prices for aerospace products. Operating income decreased by
$2.5 million, or 17.7%, from $14.1 million for the six months ended June 30,
1998 to $11.6 million for the six months ended June 30, 1999. This decrease was
primarily due to the decline in the Company's aerospace business. Operating
income as a percentage of net sales decreased from 8.3% for the six months ended
June 30, 1998 to 5.8% for the six months ended June 30, 1999. This percentage
decrease was primarily due to lower average realized prices and shipments for
aerospace products as described above.
ALUMINUM BUILDING PRODUCTS. Net sales increased $22.1 million, or 59.2%, from
$37.3 million for the six months ended June 30, 1998 to $59.4 million for the
six months ended June 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
$19.7 million, or 58.1%, from $33.9 million for the six months ended June 30,
1998 to $53.6 million for the six months ended June 30, 1999. This increase is
primarily due to the acquisitions and increased sales of the Insulated Roof
Panel products referred to above. Operating costs and expenses as a percentage
of net sales decreased from 90.9% for the six months ended June 30, 1998 to
90.2% for the six months ended June 30, 1999. This decrease is primarily due to
lower administrative costs and lower manufacturing costs attributable to the
expanded distribution of the Company's Insulated Roof Panel products. Operating
income increased by $2.4 million, or 70.6%, from $3.4 million for the six months
ended June 30, 1998 to $5.8 million for the six months ended June 30, 1999. This
increase is primarily due to the acquired companies and higher sales of the
Company's Insulated Roof Panels. Operating income as a percentage of net sales
increased from 9.1% for the six months ended June 30, 1998 to 9.8% for the six
months ended June 30, 1999. This increase was primarily due to 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 $1.9 million, from a loss of $6.3 million for the six months ended
June 30, 1998 to a loss of $4.4 million for the six months ended June 30, 1999.
This change is primarily due to increased cost savings attributable to
purchasing of raw material and lower administrative costs.
RESULTS OF OPERATIONS - CONSOLIDATED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
1999 % 1998 % 1999 % 1998 %
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .......................... $435.7 100.0% $377.2 100.0% $858.1 100.0% $655.7 100.0%
Cost of sales .................... 324.6 74.5% 289.3 76.7% 639.1 74.5% 503.9 76.8%
Operating and delivery ........... 45.7 10.5% 34.2 9.1% 90.1 10.5% 60.2 9.2%
Selling, general and
Administrative ................ 31.2 7.2% 24.7 6.5% 62.2 7.2% 42.8 6.5%
Depreciation and amortization .... 5.1 1.1% 3.7 1.0% 10.0 1.2% 6.7 1.1%
------ ------ ------ ------ ------ ------ ------ ------
Operating income ................... 29.1 6.7% 25.3 6.7% 56.7 6.6% 42.1 6.4%
Interest and securitization
expense ....................... 9.3 2.1% 6.2 1.6% 18.9 2.2% 11.0 1.7%
Other income, net ................ (.1) -- (1.6) (.4)% (.2) -- (1.7) (.3)%
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes ......... $ 19.9 4.6% $ 20.7 5.5% $ 38.0 4.4% $ 32.8 5.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales increased $58.5 million, or 15.5%, from $377.2 million
for the three months ended June 30, 1998 to $435.7 million for the three months
ended June 30, 1999. This increase is primarily due to the current period
contributions of the acquisitions completed during 1998 and increased shipments,
offset by lower average realized prices for most of the Company's products.
COST OF SALES. Cost of sales increased $35.3 million, or 12.2%, from $289.3
million for the three months ended June 30, 1998, to $324.6 million for the
three months ended June 30, 1999. This increase is primarily due to the current
period contributions of the acquisitions completed during 1998 and increased
shipments. As a percentage of net sales, cost of sales decreased from 76.7% for
the three months ended June 30, 1998 to 74.5% for the three months ended June
30, 1999. This percentage decrease was primarily due to lower cost of raw
materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $11.5
million, or 33.6%, from $34.2 million for the three months ended June 30, 1998
to $45.7 million for the three months ended June 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 9.1% for
the three months ended June 30, 1998 to 10.5% for the three months ended June
30, 1999. This percentage increase was primarily due to lower average realized
prices for most of the Company's products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $6.5 million, or 26.3%, from $24.7 million for the three
months ended June 30, 1998 to $31.2 million for the three months ended June 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 6.5% for the three
months ended June 30, 1998 to 7.2% for the three months ended June 30, 1999.
This percentage increase was primarily due to lower average realized prices for
most of the Company's products.
OPERATING INCOME. Operating income increased $3.8 million, or 15.0%, from
$25.3 million for the three months ended June 30, 1998 to $29.1 million for the
three months ended June 30, 1999. As a percentage of net sales, operating income
was unchanged.
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
increased $3.1 million, or 50.0%, from $6.2 million for the three months ended
June 30, 1998 to $9.3 million for the three months ended June 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 completed during 1998.
OTHER INCOME, NET. Other income decreased $1.5 million, from $1.6 million for
the three months ended June 30, 1998 to $.1 million for the three months ended
June 30, 1999. Other income for the six months ended June 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.
CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales increased $202.4 million, or 30.9%, from $655.7 million
for the six months ended June 30, 1998 to $858.1 million for the six months
ended June 30, 1999. This increase is primarily due to the current period
14
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
contributions of the acquisitions completed during 1998 and increased shipments,
offset by lower average realized prices for most of the Company's products.
COST OF SALES. Cost of sales increased $135.2 million, or 26.8%, from $503.9
million for the six months ended June 30, 1998, to $639.1 million for the six
months ended June 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 76.8% for the six months ended June 30, 1998 to 74.5% for the six
months ended June 30, 1999. This percentage decrease was primarily due to lower
cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $29.9
million, or 49.7%, from $60.2 million for the six months ended June 30, 1998 to
$90.1 million for the six months ended June 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 9.2% for the six months
ended June 30, 1998 to 10.5% for the six months ended June 30, 1999. This
percentage increase was primarily due to lower average realized prices for most
of the Company's products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $19.4 million, or 45.3%, from $42.8 million for the six
months ended June 30, 1998 to $62.2 million for the six months ended June 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 6.5% for the six
months ended June 30, 1998 to 7.2% for the six months ended June 30, 1999. This
percentage increase was primarily due to lower average realized prices for most
of the Company's products.
OPERATING INCOME. Operating income increased $14.6 million, or 34.7%, from
$42.1 million for the six months ended June 30, 1998 to $56.7 million for the
six months ended June 30, 1999. The increase in operating income was
attributable to the acquisitions completed during 1998 and the increased
shipments for most of the Company's products. As a percentage of net sales,
operating income increased from 6.4% for the six months ended June 30, 1998 to
6.6% for the six months ended June 30, 1999. This percentage increase was
primarily due to lower cost of raw materials during the six months ended June
30, 1999.
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
increased $7.9 million, or 71.8%, from $11.0 million for the six months ended
June 30, 1998 to $18.9 million for the six months ended June 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 $1.5 million, from $1.7 million
for the six months ended June 30, 1998 to $0.2 million for the six months ended
June 30, 1999. Other income for the six months ended June 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 $32.9 million in net cash from operating activities and
used $10.9 million in net cash for operating activities for the six months ended
June 30, 1999 and 1998, respectively. Net cash provided by investing activities
was $64.1 million and net cash used for investing activities was $94.1 million
for the six months ended June 30, 1999 and 1998, respectively. The cash provided
from investing activities during the six months ended June 30, 1999 included
$88.0 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 $100.1 million and net
15
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
cash provided by financing activities was $117.4 million for the six months
ended June 30, 1999 and 1998, respectively. For the six months ended June 30,
1999, the cash used for financing activities consisted primarily of the
repayment of $97.5 million of borrowings on the Credit Facility. At June 30,
1999, the Company had cash of $6.3 million, working capital of $318.4 million
and total debt of $408.4 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 June 30, 1999, the Company had $80.0 million and $178.0
million of borrowing availability under the Credit Facility. As of August 6,
1999, the Company had outstanding borrowings under the Credit Facility of $221.5
million, leaving $128.5 million available for use. The decrease in borrowing
availability under the Credit Facility is primarily a result of acquisitions
completed during July 1999. See Note 11 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 retain all of its earnings to finance the
expansion of its existing business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
common stock for the next several years. In addition, the Company's Credit
Facility and the Indenture include restrictions on the ability of the Company to
pay dividends.
INVESTING ACTIVITIES
During the first quarter of 1999, the Company acquired the businesses of
Southwest Steel in Madison, Illinois and Premier Steel in Shreveport, Louisiana,
with annual net sales of approximately $50.0 million and $15.0 million,
respectively, for cash consideration of approximately $13.1 million and the
assumption of indebtedness of approximately $1.1 million. In July 1999, the
Company acquired Wolf Brothers Steel Service Center in Philadelphia,
Pennsylvania, with annual net sales of approximately $60.0, and the net assets
of certain other businesses, for total cash consideration of approximately
$42.8, convertible notes of approximately $4.0 and the assumption of
indebtedness of approximately $3.4.
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 future acquisitions with cash, it may have to increase the
amount of the Credit Facility or obtain other sources of financing, as discussed
above.
The Company has an effective Shelf Registration Statement relating to the
issuance of up to 10,000,000 shares of common stock to be issued in connection
with future acquisitions. Approximately 7,231,423 shares are available under
this registration statement for use in connection with future acquisitions.
FINANCING ACTIVITIES
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 Receivable 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. From month to month, the amount by
16
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
which MRC's receivable portfolio exceeds the undivided interest purchased will
vary. The Company expects such amount will range between $25.0 and $35.0. The
unpurchased portion of the MRC receivable portfolio is a restricted asset and is
effectively collateral for the benefit of the Purchaser. At June 30, 1999, the
unpurchased portion of the MRC portfolio is $30.0 million. The Company repaid
approximately $97.5 million of outstanding borrowings on the Credit Facility in
the six months ended June 30, 1999 utilizing proceeds from the sale of accounts
receivable and cash flow from operations.
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 August 6, 1999, the
Company had repurchased 46,000 shares at an average price of $10.72 per share.
TRENDS
The Company expects that domestic steel prices will improve from the current
depressed levels during the second half of 1999. Domestic steel producers have
instituted "dumping" suits against the foreign steel producers which has reduced
the volume of foreign steel imports. However, realization of price increases
could be slower than expected due primarily to the additional domestic capacity
in 1999 compared to 1998 and the time period needed to exhaust the excess
industry-wide inventory levels that were accumulated in the second half of 1998.
Moreover, the realization of any such price increases is dependent upon the
continued strength of the domestic economy.
Although the Company's net sales for certain of its subsidiaries are
influenced by steel prices, its results of operations are also dependent upon
the volume and mix of value-added services and products provided to its
customers. The Company expects approximately 40% of its net sales to be affected
by the anticipated improvement in steel prices. With respect to flat-rolled
steel products, a majority of the net sales are made pursuant to advance pricing
arrangements that range from six to twelve months, which effectively mitigate
the adverse impact of short-term price declines on those products. Additionally,
approximately 30% of the Company's net sales are attributable to aluminum,
titanium and other specialty metals, which have also experienced price
reductions. In general, however, the price reductions for these other metals
have been much less than for steel.
The Company purchases the majority of its raw materials, including steel,
from domestic suppliers, however, the Company has increased its purchases of
steel from foreign suppliers in the past twelve months to take advantage of
lower cost imported steel. Accordingly, for the reasons stated in the preceding
paragraph, together with the diversity of its product mix, customer and industry
base, and a pro active monitoring of its raw material inventories with the goal
of significantly improving its current inventory turnover ratios, the Company
does not expect the depressed domestic steel prices to have a material adverse
effect on its consolidated financial position or liquidity.
YEAR 2000 ISSUE
IMPACT OF YEAR 2000. As the century date occurs, computer programs, computers
and embedded microprocessors controlling equipment with date-sensitive systems
may recognize Year 2000 as 1900 or not at all. This inability to recognize or
properly handle the year 2000 date may result in computer system failures or
miscalculations of critical information as well as failures of equipment using
date-sensitive microprocessors. The Company's various financial and operational
information systems and, in some cases, embedded microprocessors in certain
machinery and equipment that have computer systems and applications could be
affected by the Year 2000 issue.
STATE OF READINESS. In early 1998, the Company formulated a plan to address
the Year 2000 issue. To date, the Company's primary focus has been on its own
internal systems, including all types of systems used by its subsidiaries in
their operations, dealing with the most critical systems first. The Company has
expanded this plan to included third parties to help complete this Year 2000
plan.
17
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company is nearing completion of an assessment of its own systems,
including embedded microprocessors in certain machinery and equipment.
Currently, the Company is establishing timetables for the renovation of its
information systems, including modifying and upgrading software and developing
and purchasing new software, as necessary. The Company's goal is to complete the
testing and implementation phases by September 30, 1999.
During 1998, the Company began sending questionnaires to its customers,
vendors and other third parties with which the Company has material
relationships and expects to complete the assessment of such parties by the end
of September 1999. The Company is unable to estimate the costs that it may incur
to remedy the Year 2000 issues relating to such parties.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company's preliminary estimate is
that the cost of assessment, renovation and implementation of its internal
systems will range from approximately $.2 million to $.5 million, of which
approximately $.2 million has been incurred as of June 30, 1999. These costs
will 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 September 30,
1999.
18
<PAGE>
METALS USA, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
Accordingly, the Company may enter into certain derivative financial instruments
such as interest rate swap agreements. The Company does not use derivative
financial instruments for trading or to speculate on changes in interest rates.
INTEREST RATE EXPOSURE
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt. At June 30, 1999, approximately 42.1%
($172.0 million) of the long-term debt was subject to variable interest rates.
The Company entered into two interest rate swap agreements in 1998 to reduce
exposure to interest rate changes. These agreements fixed interest rates for two
years on $125.0 million of $172.0 million of variable interest long-term debt.
The effect of these agreements was to decrease the Company's exposure to
variable interest rates to $47.0 million of long-term debt. The detrimental
effect of a hypothetical 100 basis point increase in interest rates would be to
reduce income before taxes by $.5 million. At June 30, 1999, the fair value of
the Company's fixed rate debt is approximately $221.3 million based upon
discounted future cash flows using current market prices and the fair value of
the interest rate swap agreements is $1.0 million.
19
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on May 19, 1999, holders of the
Company's Common Stock elected six Class II directors. The Class II directors
will hold office until the Company's Annual Meeting in 2002, or until their
respective successors are elected. The Class II directors are: Arnold Bradburd,
Michael Christopher, Richard Kristinik, J. Michael Kirksey, Franklin Meyers, and
William Transier.
Holders of the Company's Common Stock and Restricted Common Stock ratified
the Board of Directors appointment of Arthur Andersen LLP as the Company's
independent public accountants for the year ending December 31, 1999. The
results of the vote for the ratification of the appointment of Arthur Andersen
LLP were as follows: For -- 24,939,732; Against -- 5,575; Abstentions (including
broker non-votes) -- 3,550.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
21 List of Subsidiaries of the Company
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
20
<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 accounting officer of the Registrant.
METALS USA, INC.
By: /s/ TERRY L. FREEMAN
Terry L. Freeman
Vice President, Corporate Controller
Date: August 13, 1999 and Chief Accounting Officer
21
EXHIBIT 21
METALS USA, INC.
SUBSIDIARY LIST
Aerospace Specification Metals, Inc.
Affiliated Metals Company
Aluminum Building Systems
Faitoute Steel Corporation
Federal Bronze Alloys Inc.
Flagg Steel Co.
Forest Manufacturing, Inc.
Fullerton Industries, Inc.
GSBC, Inc. (dba Geneva Steel Blanking)
Harvey Titanium, Ltd.
Industrial Metals, Inc.
Independent Metals Co.
Interstate Steel Supply Company
Interstate Steel Supply Company of Maryland
Intsel Steel
Jeffreys Steel Company, Inc.
Krohn Steel Service Center, Inc.
The Levinson Steel Company
Meier Metal Servicenters, Inc.
Metalmart, Inc.
Metals USA Management Co., L.P.
MUSA GP, Inc.
MUSA LP, Inc.
Metals USA Services Corporation
Metals Receivables Corporation
Metals USA Finance Corporation
National Manufacturing, Inc.
Pacific Metal Company
Professional Metals, Inc.
Queensboro Steel Corporation
Royal Aluminum, Inc.
R.J. Fabricating, Inc.
Sierra Pacific Steel, Inc.
Southern Alloy of America, Inc.
Steel Manufacturing and Warehouse Company
Steel Service Systems, Inc.
Texas Aluminum Industries, Inc.
Cornerstone Metals Corporation
Cornerstone Building Products, Inc.
Cornerstone Aluminum Company, Inc.
Cornerstone Patio Concepts, L.L.C.
Uni-Steel, Inc.
Valley Aluminum Co.
Wayne Steel, Inc.
Western Awning Company, Inc.
Wilkof-Morris Steel Corporation
Williams Steel & Supply Co., Inc.
Wolf Brothers Steel Center, Inc.
WSS Transportation, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,300
<SECURITIES> 0
<RECEIVABLES> 132,400
<ALLOWANCES> (7,200)
<INVENTORY> 314,000
<CURRENT-ASSETS> 459,200
<PP&E> 221,800
<DEPRECIATION> (36,300)
<TOTAL-ASSETS> 930,000
<CURRENT-LIABILITIES> 140,800
<BONDS> 0
0
0
<COMMON> 400
<OTHER-SE> 363,600
<TOTAL-LIABILITY-AND-EQUITY> 930,000
<SALES> 858,100
<TOTAL-REVENUES> 858,100
<CGS> 639,100
<TOTAL-COSTS> 801,400
<OTHER-EXPENSES> (200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,900
<INCOME-PRETAX> 38,000
<INCOME-TAX> 15,500
<INCOME-CONTINUING> 22,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,500
<EPS-BASIC> .59
<EPS-DILUTED> .59
</TABLE>
