<PAGE>
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 FISCAL QUARTER ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-7537
EARLE M. JORGENSEN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-0886610
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3050 EAST BIRCH STREET, BREA, CALIFORNIA 92821
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number: (714) 579-8823
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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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. None
----
Outstanding common stock, par value $.01 per share, at October 31, 1999 -
128 shares
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EARLE M. JORGENSEN
COMPANY TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1999 (unaudited) and 2
March 31, 1999
Consolidated Statements of Operations and Comprehensive Income for
the Three Months and Six Months Ended September 30, 1999 and
September 29, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and September 29, 1998 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 6
PART II - OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
EARLE M. JORGENSEN COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
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(UNAUDITED)
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ASSETS
Current assets:
Cash $ 14,446 $ 17,860
Accounts receivable, less allowance for doubtful accounts of $454 and
$335 at September 30, 1999 and March 31, 1999, respectively 96,501 91,356
Inventories 193,562 183,968
Other current assets 7,316 4,890
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Total current assets 311,825 298,074
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Property, plant and equipment, net of accumulated depreciation of $56,270
and $51,405 at September 30, 1999 and March 31, 1999, respectively 100,196 102,776
Net cash surrender value of life insurance policies 25,470 18,541
Debt issue costs, net of accumulated amortization 5,514 6,255
Other assets 922 1,221
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Total assets $ 443,927 $ 426,867
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 85,497 $ 87,108
Accrued employee compensation and related taxes 6,739 9,732
Accrued interest 12,023 7,638
Accrued employee benefits 10,302 9,402
Other accrued liabilities 6,805 5,752
Deferred income taxes 20,251 20,251
Current portion of long-term debt 2,400 1,500
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Total current liabilities 144,017 141,383
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Long term debt 307,277 295,006
Deferred income taxes 15,408 14,941
Other long-term liabilities 3,872 3,557
Stockholder's equity:
Preferred stock, $.01 par value; 200 shares authorized and unissued --- ---
Common stock, $.01 par value; 2,800 shares authorized; 128 shares issued
and outstanding --- ---
Capital in excess of par value 95,659 102,082
Accumulated other comprehensive loss (1,118) (1,165)
Accumulated deficit (121,188) (128,937)
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Total stockholder's equity (26,647) (28,020)
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Total liabilities and stockholder's equity $ 443,927 $ 426,867
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</TABLE>
SEE ACCOMPANYING NOTES.
2
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PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues $ 219,391 $ 225,967 $ 440,280 $ 476,543
Cost of sales 154,708 161,407 311,566 339,845
--------- --------- --------- ---------
Gross profit 64,683 64,560 128,714 136,698
Expenses:
Warehouse and delivery 29,804 30,866 59,226 61,359
Selling 8,086 8,624 16,345 17,818
General and administrative 12,330 12,274 24,676 25,785
--------- --------- --------- ---------
Total expenses 50,220 51,764 100,247 104,962
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Income from operations 14,463 12,796 28,467 31,736
Interest expense, net 10,418 10,261 20,116 20,309
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Income before income taxes 4,045 2,535 8,351 11,427
Income tax expense 290 129 602 709
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Net income 3,755 2,406 7,749 10,718
Other comprehensive income (loss), net of
income tax (15) (102) 47 (169)
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Comprehensive income $ 3,740 $ 2,304 $ 7,796 $ 10,549
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</TABLE>
SEE ACCOMPANYING NOTES.
3
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PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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SEPTEMBER 30, September 29,
1999 1998
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OPERATING ACTIVITIES
Net income $ 7,749 $ 10,718
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 4,954 4,481
Amortization of debt issue costs 741 647
Accrued postretirement benefits 240 240
ESOP contribution 1,399 1,765
Deferred income taxes 467 662
(Gain) loss on sale of property, plant and equipment 49 (406)
Provision for bad debts 516 531
Increase in cash surrender value of life insurance over (6,639) (5,766)
premiums paid
Changes in assets and liabilities:
Accounts receivable (5,661) 13,739
Inventories (9,594) (37,151)
Accounts payable and accrued liabilities and expenses 335 (19,824)
Non-trade receivable (1,848) ---
Other (176) 1,234
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Net cash used in operating activities (7,468) (29,130)
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INVESTING ACTIVITIES
Additions to property, plant and equipment (2,928) (4,280)
Proceeds from the sale of property, plant and equipment 513 2,733
Premiums paid on life insurance policies (290) (34)
Proceeds from redemption of life insurance policies --- 836
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Net cash used in investing activities (2,705) (745)
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FINANCING ACTIVITIES
Net borrowings under revolving loan agreements 14,171 27,829
Payments on other debt (1,000) (1,000)
Cash dividend to parent (6,422) (1,077)
Payment of debt issue costs --- (1,728)
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Net cash provided by financing activities 6,749 24,024
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Effect of exchange rate changes on cash 10 (82)
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NET DECREASE IN CASH (3,414) (5,933)
Cash at beginning of period 17,860 20,763
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CASH AT END OF PERIOD $ 14,446 $ 14,830
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</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The Earle M. Jorgensen Company (the "Company") is a wholly owned subsidiary
of the Earle M. Jorgensen Holding Company, Inc. ("Holding").
The accompanying consolidated condensed financial statements include the
accounts of the Company and its wholly owned subsidiaries including Earle
M. Jorgensen (Canada) Inc. and Stainless Insurance Ltd., a captive
insurance subsidiary. All significant intercompany accounts and
transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements have been prepared in accordance with the
instructions to Form 10-Q and include all adjustments (consisting of normal
recurring accruals) and disclosures considered necessary for a fair
presentation of the consolidated financial position of the Earle M.
Jorgensen Company at September 30, 1999, the consolidated results of
operations and comprehensive income for the three months and six months
ended September 30, 1999 and September 29, 1998, and consolidated cash
flows for the six months ended September 30, 1999 and September 29, 1998.
The consolidated results of operations and comprehensive income for the
three months and six months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended
March 31, 1999.
2. COMPREHENSIVE INCOME
Effective April 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes rules for the reporting and disclosure of
comprehensive income and its components. Comprehensive income included
foreign currency translation adjustments of ($15,000) and ($102,000) for
the comparative three months and $47,000 and ($169,000) for the comparative
six months ended September 30, 1999 and September 29, 1998, respectively.
Prior to the adoption of SFAS No. 130, we reported foreign currency
translation adjustments separately in stockholder's equity. The adoption of
SFAS No. 130 had no impact on our net income or stockholder's equity.
3. SUBSEQUENT EVENT
In October 1999, we entered into an agreement for the sale of assets of our
service center in Honolulu, Hawaii for approximately $5.1 million. The sale
is expected to be completed by December 1999 and will result in a net loss
of approximately $1.0 million. Proceeds from the sale will be used to
reduce our revolving credit facility.
5
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PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX
MONTHS ENDED SEPTEMBER 29, 1998.
REVENUE. Revenues for the first six months of fiscal 2000 were $440.3 million,
compared to $476.5 million for the same period in fiscal 1999. Revenues from our
domestic operations decreased $38.1 million (8.3%) to $423.3 million in the
first six months of fiscal 2000 when compared to $461.4 million for the same
period in fiscal 1999. This decrease was attributable to lower metal prices.
Tonnage shipped during the first six months of fiscal 2000 was comparable to the
shipments for the same period in fiscal 1999, although demand was weaker in
certain core products and in key industries that we serve, particularly
agricultural equipment and oil services. Revenues from domestic stock sales
decreased approximately 10% as the result of lower average prices. Revenues from
our Canadian operations increased $1.9 million (12.6%) to $17.0 million in the
first six months of fiscal 2000 when compared to $15.1 million for the same
period in fiscal 1999 as the result of strong local economic conditions.
GROSS PROFIT. Gross profit for first six months of fiscal 2000 was $128.7
million, compared to $136.7 million for the same period in fiscal 1999.
Consolidated gross margin for the first six months of fiscal 2000 increased to
29.2% when compared to 28.7% for the same period in fiscal 1999. Gross profit
for the fiscal 2000 period included a LIFO credit of $2.5 million versus a LIFO
charge of $0.7 million in the fiscal 1999 period. Gross profit from our Canadian
operations was $3.9 million and gross margin was 22.9% during the first six
months of fiscal 2000, compared to $3.3 million and 21.9%, respectively, for the
same period in fiscal 1999. Exclusive of Canadian operations and LIFO
adjustments, our gross margin was 28.9% for the first six months of fiscal 2000
compared to 29.1% for the same period in fiscal 1999.
EXPENSES. Total operating expenses for the first six months of fiscal 2000 were
$100.2 million (22.8% of revenues), compared to $105.0 million (22.0% of
revenues) for the same period in fiscal 1999. The lower operating expenses
generally reflect the impact from lower revenue levels and the results of the
ongoing reengineering and cost reduction programs designed to improve asset and
employee productivity and operating profits.
Warehouse and delivery expenses for the first six months of fiscal 2000 were
$59.2 million (13.4% of revenues), compared to $61.4 million (12.9% of revenues)
for the same period in fiscal 1999. The fiscal 2000 period benefited from lower
compensation expense and transportation costs resulting from improved production
and transportation scheduling capabilities. As of September 30, 1999, 1,113
employees were involved in warehouse and delivery activities, compared to 1,165
as of September 29, 1998.
Selling expenses for the first six months of fiscal 2000 were $16.3 million
(3.7% of revenues), compared to $17.8 million (3.7% of revenues) for the same
period in fiscal 1999. The decrease resulted from lower accruals for incentive
compensation based on sales and gross profit levels and a 6% decrease in
headcount resulting from efficiencies realized in processing customer orders.
General and administrative expenses for the first six months of fiscal 2000 were
$24.7 million (5.6% of revenues), compared to $25.8 million (5.4% of revenues)
for the same period in fiscal 1999. The fiscal 2000 period included lower costs
associated with environmental matters, lower consulting charges and other
expenses related to reengineering and cost reduction programs implemented in
fiscal 1999 and lower compensation expenses resulting from a 10% decrease in
headcount, partially offset by lower income earned on redemption of life
insurance policies and losses (versus gains in the fiscal 1999 period) from sale
of fixed assets.
6
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PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX
MONTHS ENDED SEPTEMBER 29, 1998. (CONTINUED)
NET INTEREST EXPENSE. Net interest expense was $20.1 million for the first six
months of fiscal 2000 compared to $20.3 million in the same period in fiscal
1999. Such amounts include interest and amortization of debt issue costs related
to our revolving credit facility ("Revolving Credit Facility"), our 9-1/2%
senior notes ("Senior Notes"), our variable rate term loan ("Term Loan") and
interest on borrowings against the cash surrender value of certain life
insurance policies we maintain.
Interest expense and amortization of debt issue costs related to the our
outstanding indebtedness (excluding those borrowings against the cash surrender
value of certain life insurance policies) totaled $14.2 million for the first
six months of fiscal 2000 compared to $15.2 million for the same period in
fiscal 1999. The average outstanding indebtedness during the fiscal 2000 period
was $311.7 million, compared to $335.1 million for the same period in fiscal
1999. The weighted-average interest rate on such indebtedness was 8.13% during
the first six months of fiscal 2000 versus 8.64% during the same period in
fiscal 1999. During the six months ended September 30, 1999 and 1998, borrowings
under the Revolving Credit Facility averaged $95.9 million and $117.7 million
and the average interest rate on such borrowings was 7.04% and 7.73%,
respectively.
Interest expense on borrowings against the cash surrender value of certain life
insurance policies maintained was $6.0 million for the first six months of
fiscal 2000 period compared to $5.1 million for the same period in fiscal 1999.
The interest rates on our 9 1/2% Senior Notes and on the borrowings under the
life insurance policies are fixed at 9.50% and 11.76%, respectively. The
interest rates on our Revolving Credit Facility and Term Loan are floating
(7.29% and 8.63%, respectively, as of September 30, 1999). Pursuant to an
interest rate swap agreement entered into with Bankers Trust Company in June
1998, the interest rate on the Term Loans was fixed at approximately 9.05%
through June 2003 (the "Fixed Rate"). The agreement requires Bankers Trust
Company to make payments to us each quarter in an amount equal to the product of
the notional amount of $95 million and the difference between the three month
London Interbank Offered Rate plus 3.25% ("Floating LIBOR") and the Fixed Rate,
if the Floating LIBOR is greater than the Fixed Rate, on a per diem basis. If
Floating LIBOR is lower than the Fixed Rate, we are required to pay Bankers
Trust Company an amount equal to the product of the notional amount and the
difference between the Fixed Rate and Floating LIBOR on a per diem basis. During
the six months ended September 30, 1999, we paid Bankers Trust Company $0.3
million of interest as calculated under the provisions described above.
INCOME TAXES. Income tax expense for the first six months of fiscal 2000 and
1999 included provisions for state franchise and foreign income taxes. Federal
tax provisions for the first six months of fiscal 2000 and 1999 were offset by
recognition of tax benefits associated with our loss carryforwards.
7
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 29, 1998. (CONTINUED)
REVENUE. Revenues for the second quarter of fiscal 2000 were $219.4 million,
compared to $226.0 million for the same period in fiscal 1999. Revenues from our
domestic operations decreased $7.9 million (3.6%) to $211.1 million in the
second quarter of fiscal 2000 when compared to $219.0 million for the same
period in fiscal 1999. This decrease was attributable to lower metal prices,
partially offset by a 5% increase in tonnage shipped, although demand was weaker
in certain core products and in key industries that we serve, particularly
agricultural equipment and oil services. Revenues from domestic stock sales
decreased approximately 6% as the result of a 10% decrease in average prices,
partially offset by a 4% increase in tonnage shipped. Revenue from our Canadian
operations increased 18.6% to $8.3 million in the second quarter of fiscal 2000
when compared to $7.0 million in the same period in fiscal 1999 as the result of
strong local economic conditions.
GROSS PROFIT. Gross profit for the second quarter of fiscal 2000 was $64.7
million, compared to $64.6 million for the same period in fiscal 1999, while
consolidated gross margins were 29.5% and 28.6%, respectively. Gross profit for
the fiscal 2000 period included a LIFO credit of $1.5 million versus a LIFO
charge of $0.6 million in the fiscal 1999 period. Gross profit from our Canadian
operations was $1.9 million and gross margin was 22.9% during the second quarter
of fiscal 2000, compared to $1.5 million and 21.4%, respectively, for the same
period in fiscal 1999. Exclusive of our Canadian operations and LIFO
adjustments, gross margin was 29.0% for the second quarter of fiscal 2000
compared to 29.1% for the same period in fiscal 1999.
EXPENSES. Total operating expenses for the second quarter of fiscal 2000 were
$50.2 million (22.9% of revenues), compared to $51.8 million (22.9% of revenues)
for the same period in fiscal 1999. The lower operating expenses generally
reflect the impact on variable expenses from lower revenue levels and the
results of the ongoing reengineering and cost reduction programs designed to
improve asset and employee productivity and operating profits.
Warehouse and delivery expenses for the second quarter of fiscal 2000 were $29.8
million (13.6% of revenues), compared to $30.9 million (13.7% of revenues) for
the same period in fiscal 1999. The fiscal 2000 period benefited from lower
compensation expenses and lower transportation costs resulting from improved
production and transportation scheduling capabilities.
Selling expenses for the second quarter of fiscal 2000 were $8.1 million (3.7%
of revenues), compared to $8.6 million (3.8% of revenues) for the same period in
fiscal 1999. The decrease resulted from lower accruals for incentive
compensation based on sales and gross profit levels.
General and administrative expenses were $12.3 million (5.6% of revenues) during
the second quarter of 2000 compared to $12.3 million (5.4% of revenues) for the
same period in fiscal 1999. The fiscal 2000 period included lower costs
associated with environmental matters and lower consulting charges and other
expenses related to reengineering and cost reduction programs implemented in
fiscal 1999, partially offset by lower income earned on redemption of life
insurance policies and losses (versus gains in the fiscal 1999 period) from sale
of fixed assets.
NET INTEREST EXPENSE. Net interest expense was $10.4 million for the second
quarter of fiscal 2000 compared to $10.3 million in the same period in fiscal
1999. Such amounts include interest and amortization of debt issue costs related
to our revolving credit facility ("Revolving Credit Facility"), our 9-1/2%
senior notes ("Senior Notes"), our variable rate term loan ("Term Loan") and
interest on borrowings against the cash surrender value of certain life
insurance policies we maintain.
8
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PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 29, 1998. (CONTINUED)
Interest expense and amortization of debt issue costs related to the our
outstanding indebtedness (excluding those borrowings against the cash surrender
value of certain life insurance policies) totaled $7.4 million for the second
quarter of fiscal 2000 compared to $7.8 million for the same period in fiscal
1999. The average outstanding indebtedness during the second quarter of fiscal
2000 was $314.9 million, compared to $345.8 million for the same period in
fiscal 1999. The weighted average interest rate on such indebtedness was 8.54%
during the second quarter of fiscal 2000 versus 8.60% during the same period in
fiscal 1999. During the three months ended September 30, 1999 and 1998,
borrowings under the Revolving Credit Facility averaged $99.4 million and $128.8
million and the average interest rate on such borrowings was 7.18% and 7.73%,
respectively.
Interest expense on borrowings against the cash surrender value of certain life
insurance policies maintained was $3.0 million during the second quarter of
fiscal 2000 period compared to $2.5 million for the same period in fiscal 1999.
During the three months ended September 30, 1999, we paid Bankers Trust Company
$0.1 million of interest as calculated under the provisions of our interest rate
swap agreement.
INCOME TAXES. Income tax expense for the second quarter of fiscal 2000 and 1999
included provisions for state franchise and foreign income taxes. Federal tax
provisions for the second quarter of fiscal 2000 and 1999 were offset by
recognition of tax benefits associated with our loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $167.8 million at September 30, 1999 when compared
to $156.7 million at March 31, 1999 primarily as the result of higher
inventories and accounts receivable. Our primary sources of cash during the
first six months of fiscal 2000 consisted of funds provided by borrowings under
our Revolving Credit Facility, $14.2 million, while the primary uses of cash
consisted of: (i) cash used in operations, $7.5 million; (ii) dividends to
Holding, $6.4 million; and (iii) capital expenditures, $2.9 million.
Cash used in operating activities was $7.5 million (1.7% of revenues) during the
first six months of fiscal 2000 compared to $29.1 million (6.1% of revenues) for
the same period of fiscal 1999. The improvement primarily resulted from
maintaining lower levels of inventory in respect to lower revenues.
During the first six months of fiscal 2000, we redeemed $6.4 million of capital
stock from retiring and terminated employees, as required by the terms of our
ESOP and Holding's Stockholders Agreement. We expect that total redemptions
during fiscal 2000 will be approximately $12.0 million, although the timing of
such expenditures is not within our control and there can be no assurance in
this regard.
For fiscal 2000, we have planned approximately $10.0 million of capital
expenditures to be financed from internally generated funds. Approximately $7.2
million is for routine replacement of machinery and equipment and facility
improvements and expansions, and $2.8 million is for further additions to our
management information systems. During the first six months of fiscal 2000, we
spent $2.9 million for planned capital expenditures.
9
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
Our cash requirements for debt service and related obligations through the end
of fiscal 2000 are expected to consist primarily of interest payments under the
Revolving Credit Facility, interest and principal payments on the Term Loan,
interest payments on the 9 1/2% Senior Notes, dividend payments to Holding in
connection with the required repurchase of its capital stock from departing
stockholders pursuant to Holding's Stockholders' Agreement and the ESOP, capital
expenditures and principal and interest payments on our industrial revenue
bonds. As of September 30, 1999, principal payments required by our outstanding
industrial revenue bond indebtedness amount to $1.4 million in fiscal years 2001
through 2004 and $6.2 million in the aggregate thereafter through 2010. We will
not be required to make any principal payments on our 9 1/2% Senior Notes until
2005. Our Revolving Credit Facility will mature in 2003 and our Term Loan will
mature in 2004. The Term Loan requires principal payments to be made in equal
quarterly installments of $250,000. The final installment due at maturity will
repay in full all outstanding principal. As of September 30, 1999, we were in
compliance with all covenants under the Revolving Credit Facility, the Term Loan
and the 9 1/2% Senior Notes. Although compliance with such covenants in the
future is largely dependent on our future performance and general economic
conditions, for which there can be no assurance, we expect to be in compliance
with all of our debt covenants for the foreseeable future.
At September 30, 1999, our primary sources of liquidity were available
borrowings of $79.7 million under the Revolving Credit Facility, available
borrowings of approximately $12.1 million against certain life insurance
policies and internally generated funds. Borrowings under our Revolving Credit
Facility are secured by domestic inventory and accounts receivable, and future
availability is determined by prevailing levels of those assets. Our Term Loan
is secured by a second priority lien on a substantial portion of current and
future acquired unencumbered property, plant and equipment. The life insurance
policy loans are secured by the cash surrender value of the policies, are
non-recourse, and bear interest at a rate 0.5% greater than the dividend income
rate on the policies. For the first six months of fiscal 2000, dividend income
earned under the policies totaled $5.7 million, compared to $4.4 million for the
same period in fiscal 1999 and is reported as an offset to general and
administrative expenses in the accompanying statements of operations. As of
September 30, 1999, there was approximately $25.5 million of cash surrender
value in the life insurance policies we maintain, net of borrowings.
We believe our sources of liquidity and capital resources are sufficient to meet
all currently anticipated operating cash requirements, including debt service
payments on the Revolving Credit Facility, the Term Loan and the 9 1/2% Senior
Notes prior to their maturities in 2003, 2004 and 2005, respectively; however,
we anticipate that it will be necessary to replace or to refinance all or a
portion of the Revolving Credit Facility, the Term Loan and the 9 1/2% Senior
Notes prior to their respective maturities, although there can be no assurance
on what terms, if any, we would be able to obtain such refinancing or additional
financing. Our ability to make interest payments on the Revolving Credit
Facility and the 9 1/2% Senior Notes and principal and interest payments on the
Term Loan will be dependent on maintaining the level of performance reflected in
the last twelve months, which will be dependent on a number of factors, many of
which are beyond our control, and the continued availability of revolving credit
borrowings.
YEAR 2000 COMPLIANCE
IMPACT OF YEAR 2000 -The Year 2000 issue exists because many computer systems,
applications and embedded microprocessors use two rather than four digit years
to define the applicable year. Because this issue has the potential to disrupt
our business operations, a company wide Year 2000 project was initiated to
identify and resolve the potential issues surrounding the Year 2000 problem. The
Year 2000 project addresses the problems that may arise in computer
technologies, which include both information technology ("IT") and non-IT
systems, and those Year 2000 issues related to third parties that are considered
significant to our business operations.
10
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE (continued)
We named a project manager to coordinate Year 2000 issues and compliance. The
project manager's principal responsibilities include identifying, assessing,
remediating, testing, implementing and planning for contingencies related to
Year 2000 issues that could materially impact our results of operations,
liquidity, or capital resources if failure occurs.
STATE OF READINESS -Our systems principally consist of business information
systems (such as mainframe computers and distributed servers and associated
business application software) and infrastructure (such as personal computers,
operating systems, networks and devices such as hubs, switches, routers, and
phone systems). We have completed a review of our business information systems
and have identified "business critical" systems. In September 1999, we completed
testing of our business critical systems, including those that required
upgrading or replacement, and determined such systems are Year 2000 compliant.
Non-IT systems are those business tools that may contain embedded
microprocessors, such as elevators, security systems, production equipment, and
climate control systems. Our branch operations management was directed to
identify non-IT systems related to their respective facilities and to determine
the level of Year 2000 compliance or remediation required. This process was
completed in September 1999.
EXTERNAL RELATIONSHIPS - We also face a potential risk should one or more of our
principal suppliers, service providers or other parties with whom we have a
material business relationship suffer from a Year 2000 related problem. We have
identified key vendors whose Year 2000 compliance may be critical to us,
including those providing metal products, metal processing services and
transportation related services.
Surveys assessing Year 2000 compliance were distributed to these key vendors and
their responses have been compiled and reviewed. We will perform additional
selected follow-up surveys and assessment during the balance of 1999. We will
use the results of these surveys to aid in contingency planning.
CONTINGENCY PLANNING - We recognize the need for contingency planning in those
areas where it is known, or is reasonably likely that an event or an uncertainty
will create a Year 2000 system related failure with a significant negative
impact on our business operations. Contingency planning is expected to be
completed for IT and non-IT systems, and for principal suppliers or service
providers no later than November 1999, and will include among other actions,
manual workarounds and staffing reassignments.
COSTS - We have incurred approximately $500,000 of costs to address our Year
2000 issues. This amount included all costs to upgrade Year 2000 deficient
business information systems and infrastructure components, such as time and
attendance applications and phone systems.
11
<PAGE>
PART I - FINANCIAL INFORMATION (CONTINUED)
EARLE M. JORGENSEN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE (continued)
RISKS - We have completed the risk assessment, remediation and contingency
planning for our internal IT and non-IT systems, and for those parties with whom
we have a material business relationship. Although we believe it is unlikely, it
is possible our results of operations or financial position could be materially
adversely impacted if we and our major customers or suppliers do not adequately
address Year 2000 issues. We believe our "reasonable likely worst case scenario"
would involve a partial failure in one or more of our systems, or systems
maintained by principal suppliers, service providers or other parties with whom
we have a material business relationship, which would require particular
transactions or processes to be handled manually, thereby causing delays and
resulting in additional costs being incurred until the problem is corrected.
Furthermore, the price of metal products purchased by us may increase if primary
suppliers could not provide product and we were forced to purchase from
alternative sources. In addition, interruptions in telecommunications, energy
and transportation services could also have an adverse impact on our results of
operations or financial position.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant was not required to file a Form 8-K during the
quarter ended September 30, 1999.
12
<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 hereunto duly authorized.
EARLE M. JORGENSEN COMPANY
/s/ Maurice S. Nelson, Jr.
--------------------------
Date: November 5, 1999 Maurice S. Nelson, Jr.
President, Chief Executive Officer
/s/ William S. Johnson
---------------------------
Date: November 5, 1999 William S. Johnson
Vice President, Chief Financial Officer
and Secretary (Principal Financial and
Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED CONSOLIDATED
STATEMENT OF OPERATIONS AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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