<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 April 3, 1999
[ ] 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 May 17, 1999,
all of which are held by Merchants Metals Holding Company.
<PAGE> 2
MMI PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Item 1. Consolidated Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE> 3
MMI PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
April 3,
1999 January 2,
(Unaudited) 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,228 $ 1,979
Accounts receivable, net of allowance for doubtful accounts of
$2,180 and $1,926, respectively 63,591 58,633
Inventories 65,556 62,347
Deferred income taxes 2,213 1,495
Prepaid expenses 1,245 1,443
--------- ---------
Total current assets 141,833 125,897
Property, plant and equipment
Land 4,814 4,814
Buildings and improvements 17,941 17,890
Machinery and equipment 71,907 69,669
--------- ---------
94,662 92,373
Less accumulated depreciation 32,982 31,456
--------- ---------
Property, plant and equipment, net 61,680 60,917
Intangible assets 28,887 29,123
Deferred charges and other assets 5,044 4,289
--------- ---------
Total assets $ 237,444 $ 220,226
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 43,498 $ 50,328
Accrued interest 7,024 3,238
Accrued liabilities 11,572 11,175
Income taxes payable 1,918 672
Current maturities of long-term obligations 1,206 1,630
--------- ---------
Total current liabilities 65,218 67,043
Long-term obligations 175,338 158,807
Deferred income taxes and other long-term liabilities 7,528 7,383
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 13,009 13,009
Accumulated other comprehensive income, net of tax of $148 (221) (221)
Retained deficit (23,680) (26,047)
--------- ---------
Total stockholder's deficit (10,640) (13,007)
--------- ---------
Total liabilities and stockholder's deficit $ 237,444 $ 220,226
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 4
MMI PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
April 3, April 4,
1999 1998
-------- --------
<S> <C> <C>
Net sales $102,942 $ 86,308
Cost of sales 84,928 74,267
-------- --------
Gross profit 18,014 12,041
Selling, general and administrative expenses 9,145 7,330
Other (income) expense, net 147 (55)
-------- --------
Income before interest and income taxes 8,722 4,766
Interest expense 4,708 4,112
-------- --------
Income before income taxes 4,014 654
Provision for income taxes 1,647 265
-------- --------
Net income $ 2,367 $ 389
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
MMI PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 3, April 4,
1999 1998
-------- --------
<S> <C> <C>
Net income $ 2,367 $ 389
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,036 1,583
Deferred income taxes (573) 132
Other 269 58
Changes in operating assets and liabilities:
Increase in operating assets and liabilities (9,752) (8,509)
Other 209 84
-------- --------
Cash used in operating activities (5,444) (6,263)
Investing activities:
Capital expenditures (2,331) (954)
Acquisitions -- (23,154)
Other (31) 20
-------- --------
Cash used in investing activities (2,362) (24,088)
Financing activities:
Proceeds from issuance of senior subordinated notes 32,137 --
Proceeds from (payment of) revolving credit facility, net (15,421) 29,619
Debt offering costs (882) --
Payment of capital leases (447) (351)
Payment of other long-term debt (332) --
-------- --------
Cash provided by financing activities 15,055 29,268
-------- --------
Net change is cash and cash equivalents 7,249 (1,083)
Cash and cash equivalents, beginning of period 1,979 3,509
-------- --------
Cash and cash equivalents, end of period $ 9,228 $ 2,426
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
MMI PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MMI
Products, Inc. and its wholly-owned subsidiary, Security Fence Supply Co.
Inc. (collectively the "Company"). MMI Products, Inc., is a wholly-owned
subsidiary of Merchants Metals Holding Company (Holding) which is
substantially wholly-owned by MMI Products, L.L.C. The accompanying
unaudited consolidated 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
2, 1999 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on April 2, 1999.
In the opinion of management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary to present fairly the consolidated financial position
of the Company as of April 3, 1999 and the consolidated results of its
operations and its cash flows for the respective periods ended April 3,
1999 and April 4, 1998. Interim results for the three months ended April
3, 1999 are not necessarily indicative of results that may be expected for
the fiscal year ending January 1, 2000.
Effective January 3, 1999 the Company has adopted the following new
accounting standards:
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting For the
Costs of Computer Software Developed For or Obtained For Internal-Use."
The SOP requires the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining software for
internal-use. Prior to the adoption of SOP 98-1, the Company expensed
internal-use software related costs as incurred. The adoption of this
statement did not have a material impact on the consolidated results of
operations or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities", which requires that costs related to start-up activities be
expensed as incurred. This accounting treatment is consistent with the
Company's previous policy, therefore the adoption of this statement had no
impact on the consolidated results of operations or financial position.
6
<PAGE> 7
MMI PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 3, 1999
(Unaudited) January 2, 1999
----------- ---------------
(In Thousands)
<S> <C> <C>
Raw materials $16,836 $17,024
Work-in-process 1,535 1,150
Finished goods 47,185 44,173
------- -------
$65,556 $62,347
======= =======
</TABLE>
3. LONG-TERM OBLIGATIONS
On February 12, 1999, the Company issued $30 million of 11.25% senior
subordinated notes due 2007 in a private offering. The net proceeds of
approximately $31.2 million including original issuance premium, after
fees and expenses, were used to reduce its borrowings under the revolving
credit facility.
On April 30, 1999, the Company filed a registration statement on Form S-4
with the Securities and Exchange Commission to exchange the $30 million
Senior Subordinated Notes issued on February 12, 1999 for Registered
Senior Subordinated Notes. These notes have the same form and terms as the
February 12, 1999 notes and the $120 million Registered Senior
Subordinated Notes issued on April 16, 1997.
4. SEGMENT REPORTING
MMI has five operating units that are aggregated into two reportable
segments; Fence and Concrete Construction Products. The Fence Segment has
three operating units that offer similar products and services. The
Concrete Construction Products Segment has two operating units that offer
complimentary products and services within the concrete construction
industry.
Summarized financial information concerning the reportable segments is
shown in the following table. The Corporate column for earnings before
interest and income taxes represents amortization of intangibles and
nonrecurring items. Corporate general and administrative expenses are
allocated to the segments based upon proportional net sales.
7
<PAGE> 8
MMI PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Three months ended April 3, 1999
----------------------------------------------------------
Concrete
Fence Construction
Products Products Corporate Total
-------- -------- --------- --------
<S> <C> <C> <C> <C>
External sales $ 53,014 $ 49,928 $ -- $102,942
Earnings before interest and income taxes 2,405 6,593 (276) 8,722
Interest expense -- -- 4,708 4,708
Income taxes -- -- 1,647 1,647
Net income 2,405 6,593 (6,631) 2,367
Depreciation 799 961 -- 1,760
EBITDA (1) 3,204 7,554 -- 10,758
Segment Assets (2) 92,207 99,953 45,284 237,444
</TABLE>
<TABLE>
<CAPTION>
Three months ended April 4, 1998
---------------------------------------------------------
Concrete
Fence Construction
Products Products Corporate Total
-------- -------- --------- --------
<S> <C> <C> <C> <C>
External sales $ 38,917 $ 47,391 $ -- $ 86,308
Earnings before interest and income taxes 1,170 3,717 (121) 4,766
Interest expense -- -- 4,112 4,112
Income taxes -- -- 265 265
Net income 1,170 3,717 (4,498) 389
Depreciation 669 744 -- 1,413
EBITDA (1) 1,839 4,461 -- 6,300
Segment Assets (2) 73,656 95,012 31,024 199,692
</TABLE>
(1) EBITDA is defined as the sum of income before interest expense,
income taxes, depreciation, and amortization. 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.
(2) Segment assets include accounts receivable, inventory and
property, plant and equipment. Corporate assets include all other
components of total consolidated assets.
5. COMMITMENTS AND CONTINGENCIES
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 consolidated financial position or future operating results,
although no assurance can be given with respect to the ultimate outcome of
any such claim or litigation.
8
<PAGE> 9
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
------------------------------------------------
April 3, April 4,
1999 Change 1998
---------- ---------- ----------
<S> <C> <C> <C>
Fence Products $ 53,014 $ 14,097 $ 38,917
Percentage of net sales 51.5% 6.4% 45.1%
Concrete Construction Products $ 49,928 $ 2,537 $ 47,391
Percentage of net sales 48.5% (6.4%) 54.9%
Net Sales $ 102,942 $ 16,634 $ 86,308
Gross profit $ 18,014 $ 5,973 $ 12,041
Percentage of net sales 17.5% 3.5% 14.0%
Selling, general, administrative and other expenses $ 9,292 $ 2,017 $ 7,275
Percentage of net sales 9.0% 0.6% 8.4%
Income before interest and income taxes $ 8,722 $ 3,956 $ 4,766
Percentage of net sales 8.5% 2.9% 5.6%
Interest expense $ 4,708 $ 596 $ 4,112
Percentage of net sales 4.6% (0.2%) 4.8%
Effective income tax rate 41.0% 0.5% 40.5%
Net income $ 2,367 $ 1,978 $ 389
Percentage of net sales 2.3% 1.8% 0.5%
</TABLE>
Net sales for the three months ended April 3, 1999 increased $16.6 million
or 19.3% to $102.9 million from $86.3 million for the same period of the
prior fiscal year. The fence products segment contributed $14.1 million of
the total net sales increase, of which $7.7 million was attributable to
the acquisition of Security Fence and Supply Company, Inc. ("Security
Fence") in October 1998. The fence segment also benefited from mild
weather and continued growth from the expansion of its distribution
network by five locations during the fourth quarter of 1997 and first
quarter of 1998. The concrete construction products segment contributed
$2.5 million of the total net sales increase, of which $2.2 million is
from the concrete accessory product line, which contributed a full three
months of activity in 1999 of the operations acquired from The Burke Group
L.L.C. ("Burke Group") in February 1998.
Gross profit for the first quarter as a percentage of sales increased from
14.0% in 1998 to 17.5% in 1999 due primarily to the decrease of raw
material costs for both segments, with emphasis on the wire mesh product
line due to its high volume of raw material usage. In addition, both the
fence and concrete accessory product lines have benefited from a change in
product mix to higher margin products, as a result of the Security Fence
and Burke Group acquisitions.
Selling, general, administrative and other expenses as a percentage of net
sales increased 0.6% for the three months ended April 3, 1999 from the
corresponding period of the prior fiscal year due primarily
9
<PAGE> 10
to increased amortization of intangibles resulting from 1998 business
acquisitions, other non-operating charges at a manufacturing facility, and
somewhat higher levels of bad debt expense.
Interest expense increased $0.6 million to $4.7 million for the three
months ended April 3, 1999 from $4.1 million for the corresponding period
of the prior fiscal year. The increases were principally due to higher
levels of invested capital as a result of the Company's business
acquisitions in February 1998 and October 1998 and higher interest rates
as a result of the issuance of the $30 million 11.25% Senior Subordinated
Notes in February 1999.
Net income for the three months ended April 3, 1999 was $2.4 million
compared to net income of $389,000 for the corresponding period of the
prior fiscal year. The increase was primarily a result of the factors
discussed above.
LIQUIDITY AND SOURCES OF CAPITAL
Cash Flows. For the three months ended April 3, 1999, operating activities
used net cash of approximately $5.4 million. Seasonal increases in net
operating assets and liabilities of $9.8 million offset operating cash
flow of $4.1 million provided by net income adjusted for non-cash items
such as depreciation, amortization, and other non-cash charges and the
increase in other long-term assets. Investing activities utilized
approximately $2.4 million of cash, principally consisting of capital
expenditures for expansion, improvement and replacement of property,
plant, and equipment. Financing activities provided approximately $15.1
million of cash, primarily from the issuance of the $30 million 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 three months of
fiscal year 1999 and 1998 was $10.8 million and $6.3 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.
The Company has signed a letter of intent for the purchase of assets
associated with a fence manufacturing facility and four distribution
facilities for approximately $13 million. The transaction will be funded
by the Company's revolving credit facility and is expected to close in the
second quarter of 1999.
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.
SEASONALITY
The Company's products are used in the commercial, infrastructure, and
residential construction industries. These industries are both cyclical
and seasonal, and changes in demand for construction
10
<PAGE> 11
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
State of Readiness. MMI completed an assessment and has completed or is in
the process of modifying or replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year
2000 and beyond. In October 1998, MMI replaced its general ledger,
accounts payable, accounts receivable, sales analysis, and financial
reporting systems with software which is Year 2000 compliant. 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.
Third Party Relationships. MMI does not expect any significant disruption
on operations in the event that any of its suppliers or customers fail to
achieve Year 2000 compliance.
Contingency Plans. Programming changes of internally developed systems may
require a reduction in the scope of modifications and/or enlistment of
third party resources if the scheduled completion date appeared to be in
jeopardy. Specific contingency plans have been identified for all of the
outstanding projects.
Risks and Uncertainties. Based on the completion of several software and
hardware replacement projects, internal plans for remaining system
modification projects, limited exposure to reliance on third party Year
2000 compliance and completion of contingency plans, MMI believes that it
will experience at most, isolated and minor disruptions of business
processes as a result of the Year 2000 issue. Such disruptions are not
expected to have a material effect on MMI's business, consolidated
financial position or results of operations. However, the magnitude of all
Year 2000 disturbances cannot be predicted. Failure to complete these
programs as planned 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, all of which could have a material
impact on MMI's business, consolidated financial position or results of
operations.
Costs. MMI's significant growth in recent years required system software
and hardware upgrades and improvements that were planned for and initiated
in 1996. Because the costs of software and hardware upgrades were already
being incurred, and planned modification of internal systems is primarily
for improvement and increased capacity, the actual cost for Year 2000
specific upgrades and modifications is not expected to exceed $100,000 and
will be expensed as incurred. In fiscal year 1999, the Company expects to
incur approximately $240,000 to complete these projects, including Year
2000 specific modifications.
11
<PAGE> 12
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MMI is subject to market risk exposure related to changes in interest
rates on it's revolving credit facility and it's senior subordinated
notes. Borrowings under the credit facility bear interest, at the option
of MMI, at either the bank's base rate plus 0.25 percent or Eurodollar
rate plus 1.5 percent. MMI is exposed to changes in the fair value of it's
$150 million 11.25% fixed rate senior subordinated notes. Although the
fair value of these notes has not fluctuated much, the variation in fair
value is a function of market interest rate changes and the investor
perception of the investment quality of the senior subordinated notes.
MMI has exposure to price fluctuations associated with steel rod, its
primary raw material. MMI negotiates purchase commitments from one to nine
months in advance to limit its exposure to price fluctuation and ensure
availability of the materials. Approximately 50% of steel rod is purchased
from foreign sources.
12
<PAGE> 13
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 A Form 8-K was filed with the Commission on
February 9, 1999. The Form 8-K reported the private
offering of $30 million 11.25% Senior Subordinated
Notes.
13
<PAGE> 14
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: May 18, 1999 By: /s/Robert N. Tenczar
-------------------------------------
Robert N. Tenczar, Vice President
and Chief Financial Officer
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 9,228
<SECURITIES> 0
<RECEIVABLES> 65,771
<ALLOWANCES> 2,180
<INVENTORY> 65,556
<CURRENT-ASSETS> 141,833
<PP&E> 94,662
<DEPRECIATION> 32,982
<TOTAL-ASSETS> 237,444
<CURRENT-LIABILITIES> 65,218
<BONDS> 150,000
0
0
<COMMON> 252
<OTHER-SE> (10,892)
<TOTAL-LIABILITY-AND-EQUITY> 237,444
<SALES> 102,942
<TOTAL-REVENUES> 102,942
<CGS> 84,928
<TOTAL-COSTS> 84,928
<OTHER-EXPENSES> 9,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,708
<INCOME-PRETAX> 4,014
<INCOME-TAX> 1,647
<INCOME-CONTINUING> 2,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,367
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
