<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 July 4, 1998
[ ] 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 [X] No [ ]
There were 252,000 shares of the Registrant's Class A Common Stock
outstanding as of the close of business on August 13, 1998,
all of which are held by Merchants Metals Holding Company.
<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 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
Item 1. CONDENSED FINANCIAL STATEMENTS AND NOTES
MMI PRODUCTS, INC.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
July 4, January 3,
1998 1998
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,649 $ 3,509
Accounts receivable, net of allowance for doubtful
accounts of $2,053 and $1,876, respectively 60,269 38,940
Inventories 64,110 48,938
Income tax receivable 1,034 1,710
Prepaid expenses and other current assets 2,341 2,384
-------- ---------
Total current assets 130,403 95,481
Property, plant and equipment
Land 5,905 4,814
Buildings and improvements 17,873 16,473
Machinery and equipment 58,400 50,343
Rental equipment 2,007 -
-------- ---------
84,185 71,630
Less accumulated depreciation 28,284 25,712
-------- ---------
Property, plant and equipment, net 55,901 45,918
Intangibles assets 18,032 5,831
Deferred charges and other assets 4,548 5,588
-------- ---------
Total assets $208,884 $152,818
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 41,600 $ 27,276
Accrued liabilities 16,775 13,197
Due to Holding, net 3,545 3,573
Current maturities of long-term debt,
including capital lease obligations 1,567 1,127
-------- ---------
Total current liabilities 63,487 45,173
Long-term debt, including capital lease obligations 156,063 122,740
Deferred income taxes and other long-term liabilities 5,921 5,778
Commitments and contingencies
Stockholder's deficit
Common stock, $1 par value; 500,000 shares
authorized; 252,000 shares issued and outstanding 252 252
Additional paid-in capital 14,711 14,711
Accumulated other comprehensive income
Additional minimum pension liability, net
of tax of $107 (151) (151)
Retained deficit (31,399) (35,685)
-------- ---------
Total stockholder's deficit (16,587) (20,873)
-------- ---------
Total liabilities and stockholder's deficit $208,884 $152,818
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
MMI PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $116,181 $ 99,044 $202,489 $168,631
Cost of sales 97,352 83,778 171,619 144,204
-------- -------- -------- --------
Gross profit 18,829 15,266 30,870 24,427
Selling, general and administrative
expenses 7,767 5,878 15,097 12,193
Other (income) expense, net 117 (120) 62 (162)
-------- -------- -------- --------
Income before interest and income
taxes 10,945 9,508 15,711 12,396
Interest expense 4,456 3,452 8,568 4,954
-------- -------- -------- --------
Income before income taxes 6,489 6,056 7,143 7,442
Provision for income taxes 2,592 2,422 2,857 2,976
-------- -------- -------- --------
Net income $ 3,897 $ 3,634 $ 4,286 $ 4,466
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
MMI PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 4, June 28,
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 4,286 $ 4,466
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,270 2,694
Other 791 1,052
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Increase in operating assets and liabilities (13,843) (8,602)
Decrease in due to Holding (28) (2,105)
Other 166 114
--------- ---------
Net cash used in operating activities (5,358) (2,381)
--------- ---------
Investing activities:
Capital expenditures (5,695) (2,187)
Acquisition (22,691) -
Other 33 40
--------- ---------
Cash used in investing activities (28,353) (2,147)
--------- ---------
Financing activities:
Proceeds from issuance of senior subordinated notes - 120,000
Proceeds from (payment of)revolving credit
facility, net 33,578 (55,958)
Payment of capital leases (727) (459)
Distribution to Holding - (56,968)
--------- ---------
Cash provided by financing activities 32,851 6,615
--------- ---------
Net change in cash and cash equivalents (860) 2,087
Cash and cash equivalents, beginning of period 3,509 234
--------- ---------
Cash and cash equivalents, end of period $ 2,649 $ 2,321
========= =========
Supplemental Cash Flow Information:
Supplemental disclosure of noncash investing activities
Issuance of capital lease obligations
for capital expenditures $ 912 $ 845
Cash paid for interest 8,258 2,084
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
MMI PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
MMI Products, Inc. (the "Company"), is a wholly owned subsidiary of
Merchants Metals Holding Company ("Holding"). The accompanying unaudited
financial statements have been prepared in accordance with generally accepted
accounting principles 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 the Company's annual financial statements for the year ended
January 3, 1998 included in the Company's Form 10-K filed with the Securities
and Exchange Commission on March 30, 1998.
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
July 4, 1998 and the results of its operations and its cash flows for the
respective periods ended July 4, 1998 and June 28, 1997. Interim results for
the six months ended July 4, 1998 are not necessarily indicative of
results that may be expected for the fiscal year ending January 2, 1999.
As of January 4, 1998, the Company adopted Financial Accounting Standards
Board Statement 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for reporting and display of comprehensive income and its
components; however, the adoption of SFAS 130 has no impact on the Company's net
income or shareholder's equity. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION> (Unaudited)
July 4, 1998 January 3, 1998
------------ ---------------
(In Thousands)
<S> <C> <C>
Raw materials $ 19,189 $ 11,188
Work-in-process 333 255
Finished goods 44,588 37,495
--------- ---------
$ 64,110 $ 48,938
========= =========
</TABLE>
<PAGE> 7
MMI PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. ACQUISITIONS
During the six months ended July 4, 1998, the Company made the
acquisitions set forth below, each of which has been accounted for as a
purchase. The financial statements include the operating results of each
business from the date of the acquisition.
On February 18, 1998, the Company acquired certain net assets of The Burke
Group L.L.C. ("Burke"), a manufacturer of hardware devices and processor of
chemicals used in the concrete construction industry. The acquisition expands
the offerings of the Company's concrete accessories product line. The total
purchase price of $20.6 million was funded by the Company's revolving credit
facility. The excess of the purchase price over the fair values of the net
assets acquired was $12.0 million and is being amortized over 40 years.
On March 2, 1998, the Company purchased substantially all of the assets of
Wholesale Fencing Supply, Inc. and affiliated entities for approximately $2.1
million, of which $1.1 million was funded by the Company's revolving credit
facility and $1.0 million by a note payable to seller. Acquired operations
include the manufacture of ornamental iron fencing in Tacoma, Washington, and
distribution of fence products in Tacoma, Washington and two Oregon locations.
The excess of the purchase price over the fair values of the net assets acquired
was $0.5 million.
4. COMMITMENTS AND CONTINGENCIES
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 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. The payment of the $3.7 million, plus or
minus any difference resulting from the settlement of the value of the common
stock plus any interest owed to the former stockholder, will be funded by the
Company's revolving credit facility and recorded as an adjustment to the
contribution of capital from Holding. The payment will therefore have no effect
on the operating results of the Company. The trial is scheduled to begin on
August 25, 1998.
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
STATEMENT OF OPERATIONS - SELECTED DATA
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
July 4, June 28, July 4, June 28,
1998 Change 1997 1998 Change 1997
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fence $ 59,365 $ 4,653 $ 54,712 $ 98,282 $ 10,159 $ 88,123
Percentage of net sales 51.1% (4.2%) 55.3% 48.6% (3.7%) 52.2%
Wire Mesh $ 35,564 $ 2,430 $ 33,134 $ 67,896 $ 6,907 $ 60,989
Percentage of net sales 30.6% (2.8%) 33.4% 33.5% (2.7%) 36.2%
Concrete Accessories $ 21,252 $ 10,054 $ 11,198 $ 36,311 $ 16,792 $ 19,519
Percentage of net sales 18.3% 7.0% 11.3% 17.9% 6.3% 11.6%
-------- -------- --------- -------- -------- ---------
Net sales $116,181 $ 17,137 $ 99,044 $202,489 $ 33,858 $168,631
Gross profit $ 18,829 $ 3,563 $ 15,266 $ 30,870 $ 6,443 $ 24,427
Percentage of net sales 16.2% 0.8% 15.4% 15.2% 0.7% 14.5%
Selling, general and
administrative expenses $ 7,767 $ 1,889 $ 5,878 $ 15,097 $ 2,904 $ 12,193
Percentage of net sales 6.7% 0.8% 5.9% 7.5% 0.3% 7.2%
Income before interest and
income taxes $ 10,945 $ 1,437 $ 9,508 $ 15,711 $ 3,315 $ 12,396
Percentage of net sales 9.4% (0.2%) 9.6% 7.8% 0.4% 7.4%
Interest expense $ 4,456 $ 1,004 $ 3,452 $ 8,568 $ 3,614 $ 4,954
Percentage of net sales 3.8% 0.3% 3.5% 4.2% 1.3% 2.9%
Effective income tax rate 40.0% 40.0% 40.0% 40.0%
Net income $ 3,897 $ 263 $ 3,634 $ 4,286 ($ 180) $ 4,466
Percentage of net sales 3.4% (0.3%) 3.7% 2.1% (0.5%) 2.6%
</TABLE>
Net sales for the three months and six months ended July 4, 1998 increased
$17.1 million (17.3%) and $33.9 million (20.1%), respectively, from the
corresponding periods of the prior fiscal year. The concrete accessories
product line generated a net sales increase of $10.0 million and $16.8 million
for the three months and six months ended July 4, 1998, respectively. This
increase in net sales was primarily a result of the acquisition of The Burke
Group L.L.C. ("Burke Acquisition") in February 1998, which contributed 77.0% and
69.6% of the concrete accessories net sales increase for the three months and
six months ended July 4, 1998, respectively. The fence product line, which
contributed $4.7 million and $10.2 million of the total net sales increase for
the three months and six months ended July 4, 1998, respectively, benefited from
improved weather conditions in the southern regions of the United States and the
expansion of its distribution network by five locations. The wire mesh product
line, which contributed $2.4 million and $6.9 million of the total net sales
increase for the three months and six months ended July 4, 1998, respectively,
benefited from recent investments to increase the capacity of several
manufacturing facilities.
<PAGE> 9
Gross profit, as a percentage of sales, increased from 15.4% to 16.2% and
from 14.5% to 15.2% for the three months and six months ended July 4, 1998,
respectively, from the corresponding periods of the prior fiscal year. The
increase in gross profit was primarily due to the increase in mix of higher
margin concrete accessories products offset by a decrease in wire mesh gross
profit margins resulting from increases in raw material costs which could not be
passed along as price increases to customers.
Selling, general, and administrative expenses as a percentage of net sales
increased 0.8% and .03% for the three months and six months ended July 4, 1998,
respectively, from the corresponding periods of the prior fiscal year. The
increase in selling, general, and administrative expenses is primarily due to
the increase in the mix of concrete accessories products (due to the Burke
Acquisition), which generally require higher levels of selling expenses than
fence and wire mesh products.
Interest expense increased $1.0 million and $3.6 million for the three
months and six months ended July 4, 1998, respectively, as compared to
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 11.25% Senior Subordinated Notes in April 1997 and increased
borrowings from the credit facility. 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 three months and six months
of fiscal year 1997 would have been $3.9 million and $7.9 million, respectively,
an increase of $0.4 million and $2.9 million over the $3.5 million and $5.0
million actually incurred. Pro forma interest expense is based on the 11.25%
rate on the Senior Subordinated Notes plus the amortization of deferred
financing costs over the life of the debt less interest expense on debt that
would have been retired.
Net income for the three months ended July 4, 1998, increased $263,000 from
the corresponding period of the prior fiscal year. Net income decreased
$180,000 for the six months ended July 4, 1998 as compared to the same period of
the last fiscal year. The changes in net income were 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 three months and six months ended July 4, 1998 would
have increased $530,000 and $1.6 million from the corresponding periods of the
prior fiscal year.
Liquidity and Sources of Capital
Cash Flows. For the six months ended July 4, 1998, operating activities
used net cash of approximately $5.4 million. Seasonal increases in net
operating assets and liabilities of $13.8 million offset operating cash flow of
$8.4 million provided by net income adjusted for non-cash items such as
depreciation, amortization, and other non-cash charges and the decrease in other
long-term assets. Investing activities utilized approximately $28.4 million of
cash, principally consisting of acquisitions. Financing activities provided
approximately $32.9 million of cash, primarily from the Company's revolving
credit facility.
<PAGE> 10
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first six months of fiscal
year 1998 and 1997 was $19.0 million and $15.1 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 line of credit, which includes a revolving credit
facility and a term 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.
The Company has pursued and intends to continue to pursue a strategy of
business acquisitions that will broaden its distribution network, complement or
extend its existing product lines or increase its production capacity. The
borrowing availability under its bank line of credit is also expected to be
available to finance such acquisitions. It is possible that, depending upon the
Company's future operating cash flows and the size of potential acquisitions,
the Company will seek additional sources of financing subject to limitations set
forth in its senior subordinated notes indenture.
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.
Impact of Year 2000
The result of computer programs being written using two digits rather than
four to define the applicable year is known as the "Year 2000" issue. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company is currently in
the process of replacing its general ledger, accounts payable, accounts
receivable, sales analysis, and financial reporting systems with software which
will be year 2000 compliant. The project is scheduled to be completed during
<PAGE> 11
the fourth quarter of 1998. Year 2000 compliance in other systems is to be
achieved through modification of internally developed programs and is scheduled
to be completed by the third quarter of 1999. Changing the scope of the
modification project or enlisting third party resources to assist in the
programming task would occur if the scheduled completion date appeared to be in
jeopardy. The Company does not expect any significant disruption on operations
in the event that any of its suppliers or customers fail to achieve Year 2000
compliance. However, if the software changes and modifications of existing
software are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.
Forward Looking Information
The statements contained in this report which are not historical facts,
including, but not limited to, statements found under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above,
are forward looking statements that involve a number of risks and uncertainties.
The actual results of the future events described in such forward looking
statements in this report could differ materially from those contemplated by
such forward looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in the
report, including without limitations the portions of such statements under the
caption referenced above, and the uncertainties set forth from time to time in
the Company's other public reports and filings and public statements.
<PAGE> 12
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> 13
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: August 13, 1998 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> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<EXCHANGE-RATE> 1.0
<CASH> 2,649
<SECURITIES> 0
<RECEIVABLES> 62,322
<ALLOWANCES> 2,053
<INVENTORY> 64,110
<CURRENT-ASSETS> 130,403
<PP&E> 84,185
<DEPRECIATION> 28,284
<TOTAL-ASSETS> 208,884
<CURRENT-LIABILITIES> 63,487
<BONDS> 120,000
0
0
<COMMON> 252
<OTHER-SE> (16,839)
<TOTAL-LIABILITY-AND-EQUITY> 208,884
<SALES> 202,489
<TOTAL-REVENUES> 202,489
<CGS> 171,619
<TOTAL-COSTS> 171,619
<OTHER-EXPENSES> 15,031
<LOSS-PROVISION> 128
<INTEREST-EXPENSE> 8,568
<INCOME-PRETAX> 7,143
<INCOME-TAX> 2,857
<INCOME-CONTINUING> 4,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,286
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
