<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 27, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-29141
MMI PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 74-1622891
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
515 West Greens Road, Suite 710
Houston, Texas 77067
(Address of Principal Executive Offices)
(281) 876-0080
(Registrant's telephone number, including area code)
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 [ ] No [X]
There were 252,000 shares of the Registrant's Class A Common Stock
outstanding as of the close of business on November 6, 1997.
<PAGE> 2
MMI PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL STATEMENTS AND NOTES NUMBER
------
<S> <C>
Item 1. Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
Item 1. CONDENSED FINANCIAL STATEMENTS AND NOTES
MMI PRODUCTS, INC.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
December September
28, 1996 27, 1997
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 234 $ 7,749
Accounts receivable, net of allowance for doubtful
accounts of $1,701 and $1,797, respectively 35,637 49,561
Inventories 41,687 46,883
Prepaid expenses and other current assets 5,037 4,043
-------- ---------
Total current assets 82,595 108,236
Property, plant and equipment
Land 4,814 4,814
Buildings and improvements 15,465 15,895
Machinery and equipment 46,639 48,905
-------- ---------
66,918 69,614
Less accumulated depreciation 22,046 24,576
-------- ---------
Property, plant and equipment, net 44,872 45,038
Intangibles assets 6,105 5,897
Deferred charges and other assets 1,691 5,740
-------- ---------
Total assets $135,263 $164,911
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 29,114 $ 36,164
Accrued interest 595 6,266
Accrued liabilities 10,538 10,802
Due to Holding, net 5,810 3,574
Current maturities of long-term debt,
including capital lease obligations 3,027 1,050
-------- ---------
Total current liabilities 49,084 57,856
Long-term debt, including capital lease obligations 52,251 122,665
Deferred income taxes and other long-term liabilities 5,394 5,661
Commitments and contingencies
Stockholder's equity (deficit)
Common stock, $1 par value; 500,000 shares
authorized; 252,000 shares issued and outstanding 252 252
Additional paid-in capital 14,599 14,711
Retained earnings (deficit) 13,683 (36,234)
-------- ---------
Total stockholder's equity (deficit) 28,534 (21,271)
-------- ---------
Total liabilities and stockholder's equity (deficit) $135,263 $164,911
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
MMI PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
26, 1996 27, 1997 26, 1996 27, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $ 82,593 $ 94,698 $210,796 $263,329
Cost of sales 69,163 80,315 176,722 224,519
-------- -------- -------- --------
Gross profit 13,430 14,383 34,074 38,810
Selling, general and administrative
expenses 5,872 5,978 16,720 18,171
Other (income) expense, net 102 8 250 (154)
-------- -------- -------- --------
Income before interest and income
taxes 7,456 8,397 17,104 20,793
Interest expense:
Affiliates 555 - 1,622 -
Other 1,374 3,861 3,818 8,815
-------- -------- -------- --------
1,929 3,861 5,440 8,815
-------- -------- -------- --------
Income before income taxes 5,527 4,536 11,664 11.978
Provision for income taxes 2,211 1,814 4,664 4,790
-------- -------- -------- --------
Net income $ 3,316 $ 2,722 $ 7,000 $ 7,188
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
MMI PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September September
26, 1996 26, 1997
--------- ---------
<S> <C> <C>
Net income $ 7,000 $ 7,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,293 4,080
Other 627 1,484
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Increase in operating assets and liabilities (2,851) (5,732)
Increase (decrease) in due to Holding 21 (2,236)
Decrease in deferred interest payable - affiliates (5,859) -
Other 613 (226)
--------- ---------
Net cash provided by operating activities $ 2,844 $ 4,558
--------- ---------
Investing activities:
Capital expenditures (2,274) (2,738)
Acquisition (17,279) (542)
Other 76 82
--------- ---------
Cash used in investing activities (19,477) (3,198)
--------- ---------
Financing activities:
Proceeds from credit facility and long-term debt 79,924 192,309
Payments on credit facility, long-term debt, and
capital lease obligations (64,804) (125,098)
Distributions to Holding - (57,105)
Debt offering costs - (3,951)
--------- ---------
Cash provided by financing activities 15,120 6,155
--------- ---------
Net change in cash and cash equivalents (1,513) 7,515
Cash and cash equivalents, beginning of period 2,163 234
--------- ---------
Cash and cash equivalents, end of period $ 650 $ 7,749
========= =========
Supplemental Cash Flow Information:
Supplemental disclosure of noncash investing activities
Issuance of capital lease obligations
for capital expenditures $ 888 $ 1,226
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
MMI PRODUCTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principals for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with MMI Products, Inc.'s (the
"Company") annual financial statements for the year ended December 28, 1996
included in the Company's registration statement on Form S-4 filed with the
Securities and Exchange Commission on August 26, 1997.
In the opinion of management, the financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary to present fairly the financial position of the Company as of
September 27, 1997 and the results of its operations and its cash flows for
the respective periods ended September 26, 1996 and September 27, 1997.
Interim results for the nine months ended September 27, 1997 are not
necessarily indicative of results that may be expected for the fiscal year
ending January 3,1998.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION> December September
28, 1996 26, 1997
-------- ---------
(In Thousands)
<S> <C> <C>
Raw materials $ 9,854 $ 12,025
Work-in-process 312 228
Finished goods 31,512 34,630
--------- ---------
$ 41,687 $ 46,883
========= =========
</TABLE>
3. LONG-TERM DEBT
On April 16, 1997, the Company issued $120 million of senior subordinated
notes due 2007. The net proceeds of $116.1 million, after fees and expenses,
were used i) to distribute $57 million to Merchants Metals Holding Company
("Holding") for the redemption by Holding of certain of its equity interests,
ii) to repay the entire $10 million principal amount, plus accrued interest,
on a senior subordinated secured note payable, iii) to repay the Company's
remaining indebtedness under a term loan facility of $11.4 million and
iv) to reduce the Company's indebtedness under the revolving credit facility.
<PAGE> 7
MMI PRODUCTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. LONG-TERM DEBT - (Continued)
On August 26, 1997, the Company filed a registration statement on Form
S-4, as amended, with the Securities and Exchange Commission to exchange the
$120 million Senior Subordinated Notes issued on April 16, 1997 for Registered
Senior Subordinated Notes, which have the same form and term as the April 16,
1997 notes.
On April 15, 1997, the Company's revolving credit facility of $48.5
million was extended through December 2001 with interest at the bank's base
rate plus 0.25 percent or Eurodollar rate plus 2.0 percent. The terms of the
revolving credit facility contain, among other provisions, affirmative and
negative covenants that require the Company to maintain certain financial
ratios, limit the amount of additional indebtedness, limit the creation or
existence of liens and set certain restrictions on acquisitions, mergers, sales
of assets, and dividend payments.
4. COMMITMENTS AND CONTINGENCIES
In November 1996, a former stockholder of Holding exercised its appraisal
rights and filed a lawsuit against Holding with respect to the value of the
common and preferred stock redeemed in connection with a recapitalization
transaction (the Recapitalization) which occurred on December 13, 1996. In
January 1997, Holding paid the stockholder $2.2 million with respect to the
value of the preferred stock, the original value offered in the
Recapitalization. The Company has recorded a liability to Holding for $3.7
million, which is equal to the amount the stockholder would have received for
its common stock if it had not exercised its appraisal rights. Although
management believes the value that the Recapitalization provided to be paid to
holders of Holding common stock was fair to such holders, there can be no
assurance that the court will agree. Any difference resulting from the
settlement of the value of the common stock would be recorded as an adjustment
to the contribution of capital from Holding and would therefore have no effect
on the operating results of the Company.
The Company is involved in a number of legal actions arising in the
ordinary course of business. The Company believes that the various asserted
claims and litigation in which it is involved will not materially affect its
financial position or future operating results, although no assurance can be
given with respect to the ultimate outcome of any such claim or litigation.
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of net sales.
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
September September September September
26, 1996 27, 1997 26, 1996 27, 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fence 56.2% 51.7% 61.5% 52.3%
Wire Mesh 32.1% 35.8% 25.8% 36.2%
Concrete Accessories 11.7% 12.5% 12.7% 11.5%
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.7% 84.8% 83.8% 85.3%
--------- --------- --------- ---------
Gross profit 16.3% 15.2% 16.2% 14.7%
Selling, general and
administrative expenses 7.1% 6.3% 8.0% 6.9%
Other (income) expense, net 0.1% - 0.1% -
--------- --------- --------- ---------
Income before interest and
income taxes 9.1% 8.9% 8.1% 7.8%
Interest expense 2.4% 4.1% 2.6% 3.3%
--------- --------- --------- ---------
Income before income taxes 6.7% 4.8% 5.5% 4.5%
Provision for income taxes 2.7% 1.9% 2.2% 1.8%
--------- --------- --------- ---------
Net income 4.0% 2.9% 3.3% 2.7%
========= ========= ========= =========
</TABLE>
Net sales for the three months and nine months ended September 27, 1997
increased $12.1 million (14.7%) and $52.5 million (24.9%), respectively, from
the corresponding periods of the prior fiscal year. Such increases were
primarily attributable to the impact of the acquisitions of the wire mesh
operations of Atlantic Steel and Florida Wire Products, and the concrete
accessories operation of Gateway Building Products that occurred in the second
half of fiscal year 1996. The Company currently is not a party to any
agreement pertaining to any business acquisitions that would cause continued
high growth in net sales. It is an essential element of the Company's
strategy, however, to identify and where justified by market and economic
forces, acquire businesses at valued prices. Increased activity in wood and
vinyl fence systems sales, and the opening of a Philadelphia area fence
product line service center in January 1997 also contributed to the increase
in sales.
As a percentage of net sales, gross profit margins decreased 1.1% and
1.5%, respectively for the three months and nine months ended September 27,
1997 from the corresponding periods of the prior fiscal year. The decline in
gross profit margin was primarily due to the shift in sales mix to lower
margin mesh products as a result of the 1996 acquisitions and increased raw
materials costs, particularly steel rod and zinc.
<PAGE> 9
Selling, general, and administrative expenses as a percentage of net
sales decreased 0.8% and 1.1% respectively for the three months and nine months
ended September 27, 1997, from the corresponding periods of the prior fiscal
year. The decrease in these expenses, as a percentage of net sales, was the
result of a change in the Company's product mix during 1997 and higher
provisions for uncollectible receivables in 1996. The Company's mesh and wire
product sales increased with the acquisition of Atlantic Steel and Florida
Wire Products. Mesh and wire products are generally sold in truckload
quantities direct from the manufacturing facility to the customer. Such sales
require relatively lower levels of selling expenses than the Company's other
product lines where a sales force is in place at each distribution location.
Interest expense increased $1.9 million (100.2%) and $3.4 million (62.0%)
respectively for the three months and nine months ended September 27,1997 from
the corresponding periods of the prior fiscal year. The increases were
principally due to the higher levels of outstanding debt as a result of the
issuance of the $120 million Senior Subordinated Notes. If the proceeds from
the issuance of the $120 million Senior Subordinated Notes had been available
at the beginning of fiscal year 1997, pro forma interest expense for the first
nine months of fiscal year 1997 would have been $12.6 million, an increase of
$3.8 million over the $8.8 million actually incurred. Pro forma interest
expense is based on the 11.25% rate on the $120 million Senior Subordinated
Notes plus the amortization of deferred financing costs over the life of the
debt.
Net income for the three months and nine months ended September 27, 1997
was $2.7 million (2.9% of net sales) and $7.2 million (2.7% of net sales),
respectively, compared to net income of $3.3 million (4.0% of net sales) and
$7.0 million (3.3% of net sales), respectively, for the corresponding periods
of the prior fiscal year. The decrease in profitability was primarily a
result of the factors discussed above. If the proceeds from the issuance of
the $120 million Senior Subordinated Notes had been available at the beginning
of fiscal year 1997, net income for the first nine months of fiscal year 1997
would have been approximately $5.0 million, a 29% decrease as compared to the
first nine months of fiscal year 1996.
LIQUIDITY AND SOURCES OF CAPITAL
On April 16, 1997, the Company issued $120 million of senior subordinated
notes due 2007. The net proceeds of $116.1 million, after fees and expenses,
were used i) to distribute $57 million to Holding for the redemption by
Holding of certain of its equity interests, ii) to repay the entire $10
million principal amount, plus accrued interest, on a senior subordinated
secured note payable, iii) to repay the Company's remaining indebtedness under
a term loan facility of $11.4 million and iv) to reduce the Company's
indebtedness under the revolving credit facility.
Cash Flows. For the nine months ended September 27, 1997, operating
activities provided net cash of approximately $4.6 million. Net income
adjusted for non-cash items such as depreciation, amortization, and other
non-cash charges provided $12.8 million of operating cash flow, of which $5.7
million was utilized primarily for seasonal increases in operating assets and
liabilities, $2.2 million was paid to Holding for it to conclude its redemption
of preferred stock in connection with the Recapitalization, and $0.2 million
was utilized due to changes in other long-term assets and liabilities.
Investing activities utilized approximately $3.2 million of cash, principally
consisting of capital expenditures and an acquisition of a fence product line
service center. Financing activities provided approximately $6.2 million of
cash, primarily from the issuance of senior subordinated notes and the use of
their net proceeds, as discussed above.
<PAGE> 10
For the nine months ended September 26, 1996, operating activities
provided net cash of approximately $2.8 million. Net income adjusted for
non-cash items such as depreciation, amortization, and other non-cash charges
provided $10.9 million of operating cash flow, of which $2.8 million was
utilized primarily for seasonal increases in operating assets and liabilities,
$5.9 million in deferred interest was paid to affiliates, and $0.6 million was
utilized due to changes in other long-term assets and liabilities. Investing
activities utilized approximately $19.5 million of cash principally for the
acquisition of the wire mesh operation of Atlantic Steel and capital
expenditures. Financing activities provided cash of approximately $15.1
million from net long-term borrowings.
Working Capital. The Company had working capital of $50.4 million as of
September 27, 1997, representing a $16.9 million increase from December 28,
1996, due primarily to the increase in accounts receivable from the Company's
higher level of sales during the third quarter (see discussion of Seasonality
below). Increases in inventories since December 28, 1996 to accommodate the
seasonal peak levels of business were offset by higher levels of accounts
payable. The Company's balance of cash and cash equivalents increased $7.5
million and accrued interest payable increased $5.7 million from the end of
1996 due principally to the issuance of the senior subordinated notes.
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first nine months of
fiscal year 1997 and 1996 was $24.9 million and $20.4 million, respectively.
The increase in EBITDA is primarily due to higher income before interest and
income taxes due to the changes in net sales, gross profit and selling, general
and administrative expenses discussed in "Results of Operations" above. EBITDA
should not be considered in isolation from or as a substitute for net income or
cash flow measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. EBITDA
is defined as the sum of income before interest, income taxes, depreciation and
amortization, and non-recurring expenses.
The Company expects that cash flows from operations and the borrowing
availability under its bank revolving credit facility will provide sufficient
liquidity to meet its normal operating requirements, capital expenditure plans,
existing debt service, and business acquisition strategy over the near term.
SEASONALITY
The Company's products are used in the residential, commercial and
infrastructure construction industries. These industries are both cyclical and
seasonal, and changes in demand for construction services have a material
impact on the Company's sales and profitability. The highest level of sales
and profitability occur during the times of the year when climatic conditions
are most conducive to construction activity. Accordingly, sales will typically
be higher in the Company's second and third quarters and will be lower in the
first and fourth quarters.
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information set forth in Note 4 in the Notes to the Financial
Statements in Part I of this report is incorporated by reference
thereto.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBIT 27 Financial Data Schedule
B. REPORTS ON FORM 8-K None
<PAGE> 12
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.
Date: November 6, 1997 By: /s/ Robert N. Tenczar
---------------------------------
Robert N. Tenczar, Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040736
<NAME> MMI PRODUCTS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1.0
<CASH> 7,749
<SECURITIES> 0
<RECEIVABLES> 51,358
<ALLOWANCES> 1,797
<INVENTORY> 46,883
<CURRENT-ASSETS> 108,236
<PP&E> 69,614
<DEPRECIATION> 24,576
<TOTAL-ASSETS> 164,911
<CURRENT-LIABILITIES> 57,856
<BONDS> 120,000
0
0
<COMMON> 252
<OTHER-SE> (21,523)
<TOTAL-LIABILITY-AND-EQUITY> 164,911
<SALES> 263,329
<TOTAL-REVENUES> 263,329
<CGS> 224,519
<TOTAL-COSTS> 224,519
<OTHER-EXPENSES> 17,826
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 8,815
<INCOME-PRETAX> 11,978
<INCOME-TAX> 4,790
<INCOME-CONTINUING> 7,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,188
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
