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
June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS 76-0289495
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 12, 1998, there were 12,172,307 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
----------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at
June 30, 1998 and December
31, 1997 (unaudited)................................ 1
Consolidated Statement of Income
for the Three Months ended
June 30, 1998 and 1997 (unaudited).................. 2
Consolidated Statement of
Income for the Six Months ended
June 30, 1998 and 1997 (unaudited).................. 3
Consolidated Statement of Cash
Flows for the Six Months
ended June 30, 1998 and 1997 (unaudited)............ 4
Notes to Unaudited Consolidated
Financial Statements ............................... 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................. 14
Item 2. Changes in Securities (no response required)
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders ................................... 14
Item 5. Other Information (no response required)
Item 6. Exhibits and reports on Form 8-K ................... 14
Item 15. Recent Sales of Unregistered Securities ............ 14
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents ......................... $ 2,129,465 $ 862,611
Accounts receivable - trade, net ............. 20,656,501 19,357,010
Inventories .................................. 21,854,632 18,888,968
Employee advances ............................ 58,823 58,823
Notes receivable, current portion ............ 4,507,195 1,303,859
Other current assets ......................... 1,055,798 1,136,955
------------ -----------
Total current assets ..................... 50,262,414 41,608,226
Property and equipment, net ........................ 28,995,459 25,857,536
Notes receivable, less current portion ............. 2,569,053 1,735,747
Other assets ....................................... 4,669,669 1,548,217
Goodwill and other, net ............................ 16,428,207 12,344,417
------------ -----------
Total assets ............................... $102,924,802 $83,094,143
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................ $ 15,200,827 $14,722,562
Accounts payable - trade ..................... 10,324,773 10,108,852
Accrued expenses and other ................... 4,466,194 4,542,231
Current portion of long-term debt ............ 3,071,416 3,274,416
------------ -----------
Total current liabilities ............... 33,063,210 32,648,061
Long-term debt, less current portion ............... 11,321,897 12,012,236
Deferred compensation payable, less current portion 229,199 241,778
Deferred income taxes payable ...................... 2,834,446 3,024,413
------------ -----------
Total liabilities ...................... 47,448,752 47,926,488
------------ -----------
Commitments and contingencies Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Common stock $.01 par value, 50,000,000
shares authorized, 10,922,239 and 9,060,496
shares issued and outstanding, respectively .. 109,222 90,605
Additional paid-in capital ...................... 44,281,621 26,981,898
Retained earnings ............................... 11,085,207 8,095,152
------------ -----------
Total shareholders' equity ........... 55,476,050 35,167,655
Total liabilities and shareholders' .. $102,924,802 $83,094,143
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1998 1997
------------ ------------
Sales .......................................... $ 38,156,144 $ 30,966,926
Cost of sales .................................. 28,513,663 22,905,855
------------ ------------
Gross profit ................................... 9,642,481 8,061,071
Selling, general and administrative expenses ... 7,011,214 5,933,928
------------ ------------
Income from operations ......................... 2,631,267 2,127,143
------------ ------------
Other income (expense):
Interest expense ........................... (674,100) (607,389)
Interest income ............................ 51,723 50,491
Other income, net ......................... 562,790 89,079
------------ ------------
Total other income (expense) ......... (59,587) (467,819)
------------ ------------
Income before income taxes ..................... 2,571,680 1,659,324
Provision for income taxes ..................... 889,682 652,891
------------ ------------
Net income ..................................... $ 1,681,998 $ 1,006,433
============ ============
Basic earnings per share ....................... $ .15 $ .12
Diluted earnings per share ..................... $ .15 $ .11
Weighted average number of common shares
outstanding - basic ......................... 10,861,624 8,514,920
Weighted average number of common shares
outstanding - diluted ....................... 11,507,714 9,177,674
See notes to consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ ------------
Sales .......................................... $ 75,862,806 $ 58,188,856
Cost of sales .................................. 56,674,539 42,889,366
------------ ------------
Gross profit ................................... 19,188,267 15,299,490
Selling, general and administrative expenses ... 14,094,907 11,317,179
------------ ------------
Income from operations ......................... 5,093,360 3,982,311
------------ ------------
Other income (expense):
Interest expense ........................... (1,305,547) (1,183,270)
Interest income ............................ 205,219 105,913
Other income, net ......................... 742,120 112,550
------------ ------------
Total other income (expense) ......... (358,208) (964,807)
------------ ------------
Income before income taxes ..................... 4,735,152 3,017,504
Provision for income taxes ..................... 1,745,097 1,214,817
------------ ------------
Net income ..................................... $ 2,990,055 $ 1,802,687
============ ============
Basic earnings per share ....................... $ .28 $ .22
Diluted earnings per share ..................... $ .27 $ .20
Weighted average number of common shares
outstanding - basic ......................... 10,589,582 8,138,607
Weighted average number of common shares
outstanding - diluted ....................... 11,183,518 8,930,598
See notes to consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30
1998 1997
------------ -----------
Cash flows from operating activities:
Net income .................................. $ 2,990,055 $ 1,802,687
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 1,858,537 1,391,860
Deferred income tax provision .............. (189,967) 125,330
Deferred compensation paid ................. (12,579) (31,667)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and employee advances (36,636) (2,799,291)
Inventories .............................. 81,212 (1,376,688)
Notes receivable ......................... (3,930,943) 86,882
Other assets ............................. (2,559,044) 697,347
Accounts payable ......................... (771,037) (113,360)
Accrued expenses ......................... (1,012,168) 733,644
------------ -----------
Net cash provided (used)
by operating activities .......... (3,582,570) 516,744
Cash flows from investing activities:
Purchase of property and equipment ............ (1,714,608) (1,562,966)
Purchase of subsidiaries, net of cash ......... (3,170,413) (2,099,581)
------------ -----------
Net cash used by investing activities . (4,885,021) (3,662,547)
------------ -----------
Cash flows from financing activities:
Net borrowing under revolving line of credit .. 478,265 (195,032)
Proceeds from long-term debt .................. 247,062 1,124,561
Principal payments on notes payable,
long-term debt and capital
lease obligations .......................... (3,789,222) (796,568)
Proceeds from issuance of common stock ........ 12,798,340 1,529,136
Repurchase of common stock by an
acquired company ............................. (358,389)
------------ -----------
Net cash provided by financing activities .. 9,734,445 1,303,708
------------ -----------
Net increase (decrease) in cash and equivalents . 1,266,854 (1,842,095)
Cash and equivalents, beginning of period ....... 862,611 3,420,653
------------ -----------
Cash and equivalents, end of period ............. $ 2,129,465 $ 1,578,558
============ ===========
Non-cash financing activities:
Debt converted to equity ................. $ 2,760,000
Cash paid for:
Interest ................................. $ 1,336,350 $ 1,177,644
Income taxes ............................. $ 2,103,326 $ 355,000
See notes to consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. These financial
statements include the accounts of Industrial Holdings, Inc. and its
subsidiaries (the "Company"). All significant intercompany balances
have been eliminated in consolidation. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
NOTE B INVENTORY
Inventory consists of the following:
June 30 December 31
1998 1997
----------- -----------
Raw materials ............. $ 3,878,606 $ 3,142,217
Finished goods ............ 13,310,923 11,922,031
Other ..................... 4,665,103 3,824,720
----------- -----------
$21,854,632 $18,888,968
NOTE C INVESTMENT IN LIMITED PARTNERSHIP
In connection with the acquisition of Philform, the Company
contributed certain equipment as well as Philform's operating
activities to a limited partnership in exchange for a 49% interest
in that limited partnership. The Company's investment in the limited
partnership of $1,098,294 is included in the balance sheet in other
assets. The Company's equity in the earnings of the limited
partnership was $598,294 for the six months ended June 30, 1998 and
is included in other income.
5
<PAGE>
NOTE D RECLASSIFICATION
Certain amounts have been reclassified from previous periods to
conform to the current presentation.
NOTE E NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial
information that historically has not been recognized in the
presentation of net income. SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations. For
the six months ended June 30, 1998 and 1997, the Company had no
items of comprehensive income, and as a result the Company's
reported net income was the same as comprehensive income.
In February 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits, which revises certain disclosure
requirements of the employer, and is effective for fiscal years
beginning after December 15, 1998. Management is evaluating what, if
any, additional disclosures may be required upon the implementation
of SFAS No.
132.
In March 1998, the Accounting Standards Executive Committee
("AcSEC") of the American Institute of Certified Public Accountants
("AICPA") reached a consensus on Statement of Position ("SOP") No.
98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use, which provides guidance on accounting for
the costs of computer software. SOP No. 98-1 is effective for the
fiscal years beginning after December 15, 1998. Management is
evaluating what, if any, impact this SOP will have on the Company
upon implementation.
In April 1998, the AcSEC of the AICPA reached a consensus on SOP NO.
98-5, Reporting on the Costs of Start-Up Activities, which provides
that the costs of such activities be expensed as incurred. SOP NO.
98-5 is effective for fiscal years beginning after December 15,
1998. Management is evaluating what, if any, impact this SOP will
have on the Company upon implementation.
In March 1998, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 97-11, Accounting for the Internal
Costs Relating to Real Estate Property Acquisitions, which requires
that internal costs of identifying and acquiring operating
properties be expensed as incurred. For the six months ended June
30, 1998 and 1997, all internal costs incurred in real estate
property acquisitions were expensed.
6
<PAGE>
NOTE F ACQUISITIONS
In February 1998, the Company acquired Philform, Inc. ("Philform")
along with certain leased operating assets (the "Equipment") for
419,773 shares of the Company's common stock valued at $4,520,000.
Simultaneously, Philform contributed the Equipment and its
activities to OF Acquisition L.P., a limited partnership (the
"Partnership"), in exchange for a 49% limited partnership interest.
Prior to its acquisition by the Company, Philform manufactured and
sold forming and fastening systems primarily to the automotive
industry. After the acquisition, the business and operations
previously conducted by Philform are conducted by the Partnership.
This acquisition has been accounted for by the purchase method of
accounting and, accordingly, assets and liabilities have been
recorded at their estimated fair values at the date of acquisition.
The final purchase price allocation of Philform is subject to
certain adjustments relating to the appraised value of assets and
certain other accruals. The results of operations of Philform have
been included in the consolidated financial statements from the date
of acquisition.
In March 1998, the Company acquired all of the outstanding capital
stock of WHIR Acquisition, Inc., doing business as Ameritech
Fastener Manufacturing, Inc. ("Ameritech") for 124,000 shares of the
Company's common stock, upon merger of a wholly owned subsidiary of
the Company with and into Ameritech, with Ameritech being the
surviving corporation. As a result, Ameritech became a wholly owned
subsidiary of the Company. Ameritech, located in Houston, Texas,
manufactures fasteners for sale to the aerospace, automotive,
petroleum and petrochemical industries.
In March 1998, the Company acquired all of the outstanding common
stock of GHX, Incorporated ("GHX") for 693,878 shares of the
Company's common stock, upon merger of a wholly owned subsidiary of
the Company with and into GHX, with GHX being the surviving
corporation. As a result, GHX became a wholly owned subsidiary of
the Company. GHX, located in Houston, Texas, fabricates and
distributes industrial gaskets and molded rubber products and
distributes industrial packing, hose, fittings and high temperature
textiles to customers in the petrochemical industries.
In April 1998, the Company acquired all of the outstanding capital
stock of Moores Pump and Supply, Inc. ("Moores") for 1,600,000
shares of the Company's common stock, upon merger of a wholly owned
subsidiary of the Company with and into Moores, with Moores being
the surviving corporation. As a result, Moores became a wholly owned
subsidiary of the Company. Moores, located in Lafayette, Louisiana,
is a supplier and servicer of pumps and packers to the energy
industry, as well as provides fabrication, repair and machine shop
services to its customers.
7
<PAGE>
The mergers with Ameritech, GHX and Moores (together, the "Acquired
Companies") were accounted for as poolings-of-interests and
accordingly, the consolidated financial statements for periods prior
to the combination were restated to include the results of
operations of the Acquired Companies. Sales and net income for the
three and six months ended June 30, 1997 previously reported by the
separate companies and the combined amounts presented in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------- ----------------------------------------
INDUSTRIAL ACQUIRED COMBINED INDUSTRIAL ACQUIRED COMBINED
HOLDINGS, INC. COMPANIES COMPANIES HOLDINGS, INC COMPANIES COMPANIES
---------------- ----------- ----------- -------------- --------- ----------
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Sales ....... $ 21,284 $ 9,683 $ 30,967 $ 38,588 $19,601 $58,189
========== ========= ========= ========= ======= =======
Net income .. $ 826 $ 180 $ 1,006 $ 1,344 $ 459 $ 1,803
========== ========= ========= ========= ======= =======
Earnings per
share:
Basic . $ .14 $ .12 $ . 24 $ .22
Diluted $ .12 $ .11 $ .21 $ .20
</TABLE>
NOTE G SUBSEQUENT EVENT
Effective July 1, 1998, the Company acquired all the outstanding
capital stock of Beaird from its sole shareholder, Trinity
Industries, Inc. ("Trinity"). Beaird manufactures large and heavy
pressure vessels and storage tanks for the hydrocarbon and
petrochemical processing industry, digesters and associated vessels
for the pulp and paper industry, as well as evaporators, heat
recovery emission control products and a variety of silencers.
Beaird's revenues for its March 31, 1998 fiscal year were
approximately $59 million. The purchase price for Beaird was $28
million cash and a $5.3 million debenture convertible (the
"Debenture") to Common Stock at $12.75 per share and payable to
Trinity (the "Convertible Debenture").
Effective July 1, 1998, the Company acquired all the outstanding
capital stock of UWS for 1,247,158 shares of the Company's common
stock, upon merger of a wholly owned subsidiary of the Company with
and into UWS, with UWS being the surviving corporation. As a result,
UWS became a wholly owned subsidiary of the Company. UWS,
headquartered in Corpus Christi, Texas, manufactures, reconditions,
distributes, installs, provides maintenance for, and sells oilfield
equipment, valves, drilling spools and manifolds. UWS 1997 revenues
were $11.2 million.
8
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Industrial Holdings, Inc., operates four segments (i) Fastener
Manufacturing and Sales comprised of Landreth Engineering Company
("Landreth"), American Rivet Company, Inc. ("American"), Connecticut
Rivet ("CRivet"), WHIR Acquisition, Inc. ("Ameritech") and Philform,
Inc. ("Philform") which manufacture industrial metal fasteners for
sale primarily to manufacturers in the furniture, home appliance and
automotive industries, LSS-Lone Star-Houston, Inc. ("Lone Star"),
WALKER BOLT Manufacturing Co. ("WALKER") and GHX, Incorporated
("GHX") which manufacture industrial metal fasteners and fabricate
and distribute gaskets, hose, fittings and other products primarily
to the petrochemical and chemical refining and energy industries;
(ii) Valve and Supplies Sales which includes Pipeline Valve
Specialty, Inc. ("PVS"), Manifold Valve Services, Inc. ("MVS"),
Rogers Equipment ("Rogers"), Industrial Municipal Supply ("IMSCO"),
Moores Pump and Supply ("Moores"), and United Wellhead Services,
Inc. ("UWS") which remanufacture and sell pipeline valves, high
pressure valves and industrial valves and distribute other products
primarily to the petrochemical, chemical and petroleum refining
industries, the pipeline transportation and storage industries and
energy industries; (iii)Vessel and Components Manufacturing and
Sales comprised of Beaird Industries, Inc. ("Beaird") which
manufactures large and heavy pressure vessels and storage tanks for
the petrochemical refining industry and (iv)Machine Sales and
Service comprised of The Rex Group ("REX") which sells new and used
machine tools and provides and international export crating
services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED
JUNE 30, 1997.
SALES. On a consolidated basis, sales increased $7,189,219 or 23%
for the three months ended June 30, 1998 compared to the three
months ended June 30, 1997.
Fastener Segment sales increased 20% for the three months ended June
30, 1998 compared to the three months ended June 30, 1997. Of this
increase, 57% was attributable to growth through the acquisition of
Walker in November 1997. The remainder of the increase is
attributable to internal growth primarily as the result of improved
economic conditions in the energy sector.
9
<PAGE>
Valve Segment sales increased 25% for the three months ended June
30, 1998 compared to the three months ended June 30, 1997. Of this
increase, 21% is attributable to growth through the acquisition of
Rogers in August 1997. The remainder of the increase (or 79%) is
attributable to internal growth primarily as the result of improved
economic conditions in the energy sector.
Machine Segment sales increased 36% for the three months ended June
30, 1998 compared to the three months ended June 30, 1997 as REX was
able to secure inventory from its primary vendor for sale and
delivery to its customers.
COST OF SALES. Cost of sales increased $5,607,808 or 25% for the
three months ended June 30, 1998 compared to the three months ended
June 30, 1997.
Fastener Segment cost of sales increased 16% primarily as a result
of the increase in sales described above.
Valve Segment cost of sales increased 37% as a result of the
increase in sales described above coupled with a reduction in high
margin service revenues in the three months ended June 30, 1998
compared to the three months ended June 30, 1997.
Machine Segment cost of sales increased 41% as a result of the
increase in sales described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,077,286 or 18% for the three
months ended June 30, 1998 compared to the three months ended June
30, 1997.
Fastener Segment selling, general and administrative expense
increased 37% primarily as a result of the increases in sales
described above.
Valve Segment selling, general and administrative expenses decreased
11%. This decrease is primarily due to the elimination of certain
executive compensation and other benefits in connection with the
acquisition of Moores on April 2, 1998. Moores was accounted for as
a pooling-of-interests and its results of operations are included in
each of the periods presented.
Machine Segment selling, general and administrative expenses
increased 8% primarily as a result of the increases in sales
described above.
INTEREST EXPENSE. Interest expense increased $66,711 or 11% for the
three months ended June 30, 1998 compared to the three months ended
June 30, 1997, primarily as a result of a $4.5 million net increase
in interest bearing debt incurred to finance
10
<PAGE>
acquisitions which was offset by reductions in debt as $2.76 million
of 12% notes were converted to equity in 1997.
OTHER INCOME. Other income for the three months ended June 30,
1998, includes $324,999 of equity in income of the Partnership.
INCOME TAXES. The Company's effective tax rate was 35% for the three
months ended June 30, 1998 compared to 39% for the three months
ended June 30, 1997. The lower effective tax rate is attributable to
the fact that the effect of non-deductible goodwill amortization is
reduced as income levels increase.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE
30, 1997.
SALES. On a consolidated basis, sales increased $17,673,950 or 30%
for the six months ended June 30, 1998 compared to the six months
ended June 30, 1997.
Fastener Segment sales increased 26% for the six months ended June
30, 1998 compared to the six months ended June 30, 1997. Of this
increase, 45% was attributable to growth through the acquisition of
Walker in November 1997. The remainder of the increase is
attributable to internal growth primarily as the result of improved
economic conditions in the energy sector.
Valve Segment sales increased 43% for the six months ended June 30,
1998 compared to the six months ended June 30, 1997. Of this
increase, 56% is attributable to growth through the acquisition of
MVS in March 1997 and Rogers in August 1997 and the inclusion of a
full six months of operating results of these acquisitions in the
six months ended June 30, 1998. The remainder of the increase is
attributable to internal growth primarily as the result of improved
economic conditions in the energy sector.
Machine Segment sales increased 27% for the six months ended June
30, 1998 compared to the six months ended June 30, 1997 as REX was
able to secure inventory from its primary vendor for sale and
delivery to its customers.
COST OF SALES. Cost of sales increased $13,785,173 or 32% for the
six months ended June 30, 1998 compared to the six months ended June
30, 1997.
Fastener Segment cost of sales increased 26% primarily as a result
of the increase in sales described above.
11
<PAGE>
Valve Segment cost of sales increased 52% as a result of the
increase in sales described above coupled with a reduction in high
margin service revenues in the six months ended June 30, 1998
compared to the Six months ended June 30, 1997.
Machine Segment cost of sales increased 27% as a result of the
increase in sales described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2,777,728 or 25% for the six
months ended June 30, 1998 compared to the six months ended June 30,
1997.
Fastener Segment selling, general and administrative expense
increased 28% primarily as a result of the increases in sales
described above.
Valve Segment selling, general and administrative expenses increased
18% primarily as a result of the increases in sales described above.
Machine Segment selling, general and administrative expenses
increased 13% primarily as a result of the increases in sales
described above.
INTEREST EXPENSE. Interest expense increased $122,277 or 10% for the
six months ended June 30, 1998 compared to the six months ended June
30, 1997, primarily as a result of a $4.5 million net increase in
interest bearing debt incurred to finance acquisitions which was
offset by reductions in debt as $2.76 million of 12% notes were
converted to equity in 1997.
OTHER INCOME. Other income for the six months ended June 30, 1998,
includes $598,294 of equity in income of the Partnership.
INCOME TAXES. The Company's effective tax rate was 37% for the six
months ended June 30, 1998 compared to 40% for the six months ended
June 30, 1997. The lower effective tax rate is attributable to the
fact that the effect of non-deductible goodwill amortization
decreases as income levels increase.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1998, the Company had
cash of $2,129,465 and additional borrowing capacity under its line
of credit of $8,964,195. The Company's operations used cash of
$3,582,570 during the six months ended June 30, 1998 compared to
providing cash of $517,744 during the six months ended June 30,
1997. This change was primarily attributable to increases in notes
receivable and other assets.
Investing activities used cash of $4,885,021 for the six months
ended June 30, 1998 compared to $3,662,547 for the six months ended
June 30, 1997. This increased use
12
<PAGE>
of cash was primarily attributable to the acquisition of Philform
and purchases of property and equipment.
Financing activities provided cash of $9,734,445 for the six months
ended June 30, 1998 compared to $1,303,708 for the six months ended
June 30, 1997. This change is due to an increase in proceeds
received from the issuance of common stock as well as increased
borrowings under the line of credit. In January 1998, the Company
completed an offer (the "Offer") to the holders of its Class B
Warrants to exchange each Class B Warrant and $10 cash for one share
of Common Stock, one Class W Warrant and one Class D Warrant. The
holders of Class B Warrants tendered their warrants. The Company
received net proceeds of $10,825,000 after deducting $210,000 of
expenses incurred in connection with the Offer.
At June 30, 1998, the Company had working capital of $17,199,204
long-term debt of $11,321,897 and shareholders' equity of
$55,476,050. The Company anticipates that its operating cash needs
for fiscal 1998 can be met with cash generated from operations,
borrowings under its credit facilities with Comerica Bank-Texas, and
private placements of securities. However, any acquisition of
companies in connection with the Company's acquisition strategy will
require additional financing, which likely would include a
combination of debt and equity financing.
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation arising in the ordinary course of
its business. In the opinion of management, the ultimate liability, if
any, as a result of these matters will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders of the Company was held June
10, 1998.
(b) The following persons were elected at that meeting as Class I
Directors to serve until the third annual meeting of shareholders
following their election:
NUMBER OF VOTES
NAME OF NOMINEE FOR WITHHELD
--------------- ------- ----------
Charles J. Anderson 9,266,135 78,517
James W. Kenney 9,303,692 40,960
(c) The Company's 1998 Incentive Plan was approved.
NUMBER OF VOTES
-----------------
FOR AGAINST ABSTAIN
------ --------- ---------
6,231,148 270,090 70,446
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
On June 10, 1998, the Company amended its Report on Form 8-K announcing
its merger with Moores Pump and Supply, Inc.
Item 15.Recent Sales of Unregistered Securities
In July 1998, in connection with the merger of a wholly owned subsidiary
of the Company with United Wellhead Services, Inc. ("UWS"), the Company
exchanged 1,247,158 shares of Common Stock for the outstanding common
stock of UWS held by the shareholders of UWS.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Industrial Holdings, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: August 12, 1998 By: /s/ CHRISTINE A. SMITH
Christine A. Smith,
Chief Financial Officer and
Vice President
15
<PAGE>
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
JUNE 30, 1998
(thousands of dollars, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
Net income ............................... $ 1,682 $1,006 $ 2,990 $1,803
======= ====== ======= ======
Basic earnings per share
Weighted average common shares
outstanding - basic ............... 10,862 8,515 10,590 8,139
======= ====== ======= ======
Basic earnings per share .............. $ .15 $ .12 $ .28 $ .22
======= ====== ======= ======
Diluted earnings per share
Weighted average common
shares outstanding ................. 10,862 8,515 10,590 8,139
Shares issuable from assumed
conversion of common stock
options and warrants granted ........ 646 663 594 792
------- ------ ------- ------
Weighted average common shares
outstanding - diluted ................. 11,508 9,178 11,184 8,931
======= ====== ======= ======
Diluted earnings per share ............... $ .15 $ .11 $ .27 $ .20
======= ====== ======= ======
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ______________________________ [Identify specific financial statements] AND
IS QUALIFIED IT ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,129,465
<SECURITIES> 0
<RECEIVABLES> 20,656,501
<ALLOWANCES> 0
<INVENTORY> 21,854,632
<CURRENT-ASSETS> 50,262,414
<PP&E> 28,995,459
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,924,802
<CURRENT-LIABILITIES> 33,063,210
<BONDS> 0
0
0
<COMMON> 109,222
<OTHER-SE> 55,366,828
<TOTAL-LIABILITY-AND-EQUITY> 102,924,802
<SALES> 38,156,144
<TOTAL-REVENUES> 38,156,144
<CGS> 28,513,663
<TOTAL-COSTS> 28,513,663
<OTHER-EXPENSES> 7,011,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 674,100
<INCOME-PRETAX> 2,571,680
<INCOME-TAX> 889,682
<INCOME-CONTINUING> 1,681,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,681,998
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
