SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 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 November 12, 1998, there were 12,981,028 shares of Common Stock
outstanding.
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INDUSTRIAL HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statement of Income for the Three Months
ended September 30, 1998 and 1997 (unaudited) 2
Consolidated Statement of Income for the Nine Months
ended September 30, 1998 and 1997 (unaudited) 3
Consolidated Statement of Cash Flows for the Nine
Months ended September 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
Item 3 Quantitative and Qualitative Disclosures about Market
Risk (no response required)
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
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 (no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 15
Item 15. Recent Sales of Unregistered Securities 16
</TABLE>
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS (As restated)
Current assets:
Cash and equivalents ............................. -0- 1,677,400
Accounts receivable - trade, net ................. 41,295,970 21,392,147
Inventories ...................................... 45,294,913 20,020,386
Employee advances ................................ 58,823 113,681
Notes receivable, current portion ................ 3,609,641 1,362,095
Other current assets ............................. 5,119,345 1,096,698
----------- -----------
Total current assets ......................... 95,378,692 45,662,407
Property and equipment, net ............................... 56,727,060 26,399,464
Notes receivable, less current portion .................... 2,516,436 1,677,511
Other assets .............................................. 4,768,713 1,490,133
Goodwill and other, net ................................... 24,901,842 12,372,887
----------- -----------
Total assets ................................... 184,292,743 87,602,402
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... 36,874,643 14,993,496
Accounts payable - trade ......................... 15,152,614 10,837,780
Accrued expenses and other ....................... 10,420,635 5,699,277
Current portion of long-term debt ................ 8,176,121 3,554,962
----------- -----------
Total current liabilities ................... 70,624,013 35,085,515
Long-term debt, less current portion ...................... 45,775,754 12,953,100
Deferred compensation payable, less current portion ....... 222,675 241,778
Deferred income taxes payable ............................. 2,843,134 2,864,154
----------- -----------
Total liabilities .......................... 119,465,576 51,144,547
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, 12,981,028 and 10,307,654
shares issued and outstanding, respectively ......... 129,810 103,077
Additional paid-in capital ............................. 50,738,490 27,252,844
Retained earnings ...................................... 13,958,867 9,101,934
----------- -----------
Total shareholders' equity ............... 64,827,167 36,457,855
----------- -----------
Total liabilities and shareholders' equity 184,292,743 87,602,402
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
1
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
(As restated)
Sales .......................................... $ 61,884,849 $ 36,428,372
Cost of sales .................................. 48,160,956 26,840,372
------------ ------------
Gross profit ................................... 13,723,893 9,588,000
Selling, general and administrative expenses ... 9,835,254 6,861,718
------------ ------------
Income from operations ......................... 3,888,639 2,726,282
------------ ------------
Other income (expense):
Interest expense ......................... (1,613,868) (587,105)
Interest income .......................... 162,195 45,625
Other income, net ....................... 258,591 276,826
------------ ------------
Total other income (expense) ..... (1,193,082) (264,654)
------------ ------------
Income before income taxes ..................... 2,695,557 2,461,628
Provision for income taxes ..................... 1,018,401 945,800
------------ ------------
Net income ..................................... 1,677,156 1,515,828
Distributions to shareholders .................. -- 34,342
------------ ------------
Net income available to common shareholders .... $ 1,677,156 $ 1,481,486
============ ============
Basic earnings per share ....................... $ .13 $ .14
$ .13 $ .13
Diluted earnings per share
Weighted average number of common shares
outstanding - basic ......................... 12,471,999 10,121,737
Weighted average number of common shares
outstanding - diluted ....................... 13,466,017 11,121,738
See notes to unaudited consolidated financial statements
2
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------- -------------
(as restated)
Sales ........................................ $ 143,585,292 $ 99,577,745
Cost of sales ................................ 108,191,575 72,738,406
------------- -------------
Gross profit ................................. 35,393,717 26,839,339
Selling, general and administrative expenses . 25,671,170 19,160,229
------------- -------------
Income from operations ....................... 9,722,547 7,679,110
------------- -------------
Other income (expense):
Interest expense ....................... (2,974,047) (1,790,811)
Interest income ........................ 367,414 145,203
Other income, net ..................... 1,006,178 460,619
------------- -------------
Total other income (expense) ... (1,600,455) (1,184,989)
------------- -------------
Income before income taxes ................... 8,122,092 6,494,121
Provision for income taxes ................... 3,063,498 2,479,901
------------- -------------
Net income ................................... 5,058,594 4,014,220
Distributions to shareholders ................ 34,297 150,000
------------- -------------
Net income available to common shareholders .. $ 5,024,297 $ 3,864,220
============= =============
Basic earnings per share ..................... $ .42 $ .40
$ .40 $ .36
Diluted earnings per share
Weighted average number of common shares
outstanding - basic ....................... 12,056,749 9,630,053
Weighted average number of common shares
outstanding - diluted ..................... 12,785,738 10,491,381
See notes to unaudited consolidated financial statements
3
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
------------ ------------
Cash flows from operating activities: (As restated)
<S> <C> <C>
Net income .......................................................... $ 5,058,594 $ 4,014,220
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 3,458,832 2,260,016
Deferred income tax benefit ........................................ (21,020) (1,346)
Deferred compensation paid ......................................... (19,103) (37,650)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and employee advances ....................... (5,721,430) (4,396,442)
Inventories ..................................................... (4,699,000) (1,541,626)
Notes receivable ................................................ (2,980,772) (624,599)
Other assets .................................................... (5,969,288) (298,321)
Accounts payable ................................................ 1,029,409 1,522,480
Accrued expenses ................................................ 2,253,219 997,915
------------ ------------
Net cash provided (used)
by operating activities ................................ (7,610,559) 1,894,647
Cash flows from investing activities:
Purchase of property and equipment ..................................... (2,904,669) (1,602,886)
Purchase of subsidiaries, net of cash .................................. (4,612,761) (2,338,627)
------------ ------------
Net cash used by investing activities ....................... (7,517,430) (3,941,513)
------------ ------------
Cash flows from financing activities:
Net borrowing under revolving line of credit ........................... 6,357,425 (559,724)
Proceeds from long-term debt ........................................... 965,929 1,086,248
Principal payments on notes payable,
long-term debt and capital lease obligations ....................... (6,663,483) (2,633,254)
Proceeds from issuance of common stock ................................. 12,825,015 1,605,512
Distributions to shareholders .......................................... (34,297) (150,000)
Repurchase of common stock by an acquired company ...................... (330,609)
------------ ------------
Net cash provided (used) by financing activities ................... 13,450,589 (981,827)
------------ ------------
Net increase (decrease) in cash and equivalents ........................... 1,677,400 (3,028,693)
Cash and equivalents, beginning of period ................................. 1,677,400 3,899,639
------------ ------------
Cash and equivalents, end of period ....................................... $ -0- $ 870,946
============ ============
Non-cash financing activities:
Debt converted to equity ........................................ $ 3,093,000
Equity redeemed by debt ................................... 960,000
</TABLE>
See notes to unaudited consolidated financial statements
4
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INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine
months ended September 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 as of December 31,
1997 and 1996 and for the three-year period ended December 31,
1997.
NOTE B INVENTORY
Inventory consists of the following:
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ ------------
Raw materials ................................ $ 14,618,257 $ 3,197,946
Finished goods ............................... 23,077,204 12,997,720
Other ........................................ 7,599,452 3,824,720
------------ ------------
$ 45,294,913 $ 20,020,386
============ ============
NOTE C INVESTMENT IN LIMITED PARTNERSHIP
In connection with the acquisition of Philform, Inc.
("Philform") in February 1998 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 $1,160,226 is included in the balance sheet in
other assets. The Company's equity in the earnings of the
limited partnership was $660,226 for the nine months ended
September 30, 1998 and is included in other income.
5
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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 nine months ended
September 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.
NOTE F ACQUISITIONS
In February 1998, the Company acquired Philform, in July 1998,
the Company acquired Beaird Industries, Inc. ("Beaird"), in
August 1998, the Company acquired the assets and assumed
certain liabilities of Ideal Products ("Ideal"), in August
1998, the Company acquired A&B Bolt and Supply, Inc. ("A&B")
and in September 1998, the company acquired the assets of Erie
Manufacturing. The aggregate purchase price of these
acquisitions was $58.1 million cash and assumed liabilities
plus 1,227,854 shares of common stock valued at $10.5 million.
The aggregate excess of cost over fair value of net assets
acquired was $12.2 million. These acquisitions have 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.
Additionally, Beaird and Ideal are subject to certain post
closing, purchase price
6
<PAGE>
adjustments based upon the final determination of net assets
acquired. The final purchase price allocations for each
acquisition are subject to certain adjustments relating to the
appraised value of the assets and final determination of
accruals. The results of the acquired businesses have been
included in the financial statements from the respective
acquisition dates.
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 a provider of fabrication, repair and machine shop services
to its customers.
In July 1998, the Company acquired all the outstanding capital
stock of United Wellhead Services, Inc. ("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.
The mergers with Ameritech, GHX, Moores, and UWS (together the
"Acquired Companies") were accounted for as
poolings-of-interests (the "Poolings"). The Company's
consolidated balance sheet as of December 31, 1997 and the
consolidated statements of income for the three and nine month
periods ended September 30, 1997 have been restated to include
the results of operations of the Acquired Companies for
7
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the corresponding periods. The Company's consolidated
statements of income for the three and nine month periods
ended September 30, 1998 include the results of operations of
the Acquired Companies for the corresponding periods.
Sales, net income and earnings per share for the three and
nine month periods ended September 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 SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 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 .......... $ 21,054 $ 15,374 $ 36,428 $ 59,642 $ 39,936 $ 99,578
============= ========= ========== ============= ========= ==========
Net income ..... $ 666 $ 850 $ 1,516 $ 2,010 $ 2,004 $ 4,014
============= ========= ========== ============= ========= ==========
Earnings per
share:
Basic . $ .10 $ .14 $ .34 $ .40
Diluted $ .09 $ .13 $ .30 $ .36
</TABLE>
8
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PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
The Company, incorporated in August 1989, operates four business
segments which are organized into operating divisions:
(i) FASTENER MANUFACTURING AND SALES DIVISION (THE "FASTENER
DIVISION") which manufactures industrial metal fasteners and
metal components for sale primarily to manufacturers in the
home furnishings and automotive industries and which
manufactures and distributes industrial metal fasteners and
fabricates and distributes gaskets, hose, fittings and other
products primarily to the petrochemical and chemical refining
and energy industries;
(ii) VALVE AND PUMP MANUFACTURING AND REPAIR DIVISION (THE "VALVE
DIVISION") which remanufactures and sells pumps and high
pressure valves, including pipelines valves, blow out
preventers, manifold valves and wellhead valves, and
distributes other products primarily to the petrochemical,
chemical and petroleum refining industries, the pipeline
transportation and storage industries and energy industries;
and
(iii) COMPONENTS AND CONSTRUCTION DIVISION (THE "COMPONENTS
DIVISION") which manufactures large and heavy pressure
vessels, heat exchangers and storage tanks for the electric
power, petrochemical, chemical and petroleum refining
industries, and provides engineering and construction of
portions of desalination, electric power and petrochemical
plants;
(iv) MACHINE SALES AND SERVICE DIVISION (THE "MACHINE DIVISION")
which sells new and used machine tools and provides export
crating services.
9
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RESULTS OF OPERATIONS
(ooo's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Sales: ....................... (1) -- (1) --
Fastener Division ... $ 27,976 $ 18,945 $ 72,821 $ 54,587
Valve Division ...... 12,309 13,540 39,667 33,566
Components Division . 19,020 19,020
Machine Division .... 2,580 3,943 12,077 11,425
--------- --------- --------- ---------
61,885 36,428 143,585 99,578
Cost of Sales:
Fastener Division ... 21,400 13,963 54,247 40,104
Valve Division ...... 8,318 9,402 27,403 22,765
Components Division . 16,375 16,375
Machine Division .... 2,068 3,475 10,167 9,869
--------- --------- --------- ---------
48,161 26,840 108,192 72,738
Selling, General and
Administrative:
Fastener Division ... 5,227 3,632 13,411 10,000
Valve Division ...... 2,019 2,377 7,677 6,693
Components Division . 1,600 1,600
Machine Division .... 527 639 1,881 1,841
Corporate ........... 462 214 1,101 627
--------- --------- --------- ---------
9,835 6,862 25,670 19,161
Income for Operations ........ $ 3,889 $ 2,726 $ 9,723 $ 7,679
========= ========= ========= =========
(1) COMPONENT DIVISION. The Component Division is comprised solely of Beaird
Industries which was acquired July 1, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997.
SALES. On a consolidated basis, sales increased $25,456,000 or 70% for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997. This increase is related to the acquisition in July 1998 of Beaird. The
results of operations of Beaird are included in that of the Company from the
date of the acquisition.
Fastener Division sales increased $9,031,000 or 48% for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997. This
increase was attributable to growth through the acquisition of Walker Bolt
Manufacturing "(Walker") in November 1997 and Ideal Products ("Ideal") and A&B
Bolt & Supply, Inc. (A&B") in August 1998.
10
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Valve Division sales decreased $1,231,000 or 9% for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997. This
decrease was primarily attributable to a decrease in sales at Moores as a result
of the decline in the price of oil and the resulting budget cuts by Moores'
customers for production and maintenance.
Machine Division sales decreased $1,363,000 or 35% for the three months ended
September 30, 1998 compared to the three months ended September 30,1997 as
the demand for machine tools declined.
COST OF SALES. Cost of sales increased $21,321,000 or 79% for the three months
ended September 30, 1998 compared to the three months ended September 30, 1997.
Fastener Division cost of sales increased $7,437,000 or 53% for the three months
ended September 30, 1998 compared to the three months ended September 30, 1997.
Approximately 87% of that increase is attributable to the acquisitions of
Walker, Ideal, and A&B. The remainder of the increase is attributable to the
adverse effect of the General Motors' strike and expenses associated with
closing a manufacturing facility in El Paso, Texas.
Valve Division cost of sales decreased $1,084,000 or 12% as a result of the
decrease in sales at Moores described above.
Machine Division cost of sales decreased $1,407,000 or 40% as a result of the
decrease in sales described above.
SELLING. GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2,973,000 or 43% for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997.
Fastener Division selling, general and administrative expenses increased
$1,595,000 or 44% primarily as a result of the acquisitions described above.
Valve Division selling, general and administrative expenses decreased $358,000
or 15%. 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, as well as other reductions in general and administrative
expenses at Moores attributable to reductions in personnel and managers'
compensation in response to decreases in sales. Moores was accounted for as a
pooling-of-interests and its results of operations are included in each of the
periods presented.
Machine Division selling, general and administrative expenses decreased $112,000
or 18% primarily as a result of the decreases in sales described above.
11
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Corporate selling, general and administrative expenses increased $249,000 or
116%. This increase was attributable to staff additions (Director of Human
Resources, Vice-President of Mergers and Acquisitions, Corporate Analyst and a
Loss Control Manager) and increases in insurance expense, state franchise taxes
and building maintenance expenses.
INTEREST EXPENSE. Interest expense increased $1,027,000 or 175% for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997, primarily as a result of an increase in the Company's Line of Credit
facility ("Line of Credit") with Comerica Bank - Texas ("Comerica") from
$10,496,000 at December 31, 1997 to $35,171,000 at September 30, 1998, the
addition of $12,000,000 in term debt with Comerica at an interest rate of LIBOR
plus 2.75% payable in equal installments through June 2003, a $15,000,000 note
payable to EnSerCo at an interest rate of LIBOR plus 5% due December 1999, a
$7,500,000 term note payable to Heller at LIBOR plus 2.5% in equal installments
through December 2003 and a $5,312,500 seller note payable to Trinity
Industries, all of which were primarily incurred to finance the Company's
acquisitions.
INCOME TAXES. The Company's effective tax rate was 38% for the three months
ended September 30, 1998 and for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997.
SALES. On a consolidated basis, sales increased $44,007,000 or 44% for the nine
months ended September 30, 1998 compared to the nine months ended September 30,
1997.
Fastener Division sales increased $18,234,000 or 33% for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997. Of this
increase, approximately 71% was attributable to growth through the acquisition
of Walker in November 1997 and Ideal and A&B in August of 1998. The remainder of
the increase is attributable to internal growth primarily as the result of
improved economic conditions in the energy sector.
Valve Division sales increased $6,101,000 or 18% for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997. Of this
increase, approximately 29% is attributable to growth through the acquisition of
Manifold Valve Services, Inc. ("MVS") in March 1997 and Rogers Equipment &
Supply ("Rogers") in August 1997 and the inclusion of a full nine months of
operating results of these acquisitions in the nine months ended September 30,
1998. The remainder of the increase is attributable to internal growth primarily
as the result of improved economic conditions in the energy sector.
12
<PAGE>
Machine Division sales increased $652,000 or 6% for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 as the
Rex Group, Inc.("REX") was able to secure inventory from its primary vendor for
sale and delivery to its customers in the first nine months of 1998.
COST OF SALES. Cost of sales increased $35,454,000 or 49% for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997.
Fastener Division cost of sales increased $14,143,000 or 35% primarily as a
result of the increase in sales described above.
Valve Division cost of sales increased $4,638,000 or 20% as a result of the
increase in sales described above.
Machine Division cost of sales increased $298,000 or 3% as a result of the
increase in sales described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6,509,000 or 34% for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997.
Fastener Division selling, general and administrative expense increased
$3,411,000 or 34% primarily as a result of the increases in sales described
above.
Valve Division selling, general and administrative expenses increased $984,000
or 15% primarily as a result of the increases in sales described above.
Machine Division selling, general and administrative expenses increased $40,000
or 2% primarily as a result of the increases in sales described above.
Corporate selling, general and administrative expenses increased $474,000 or
76%. This increase was attributable to staff additions (Director of Human
Resources, Vice-President of Mergers and Acquisitions, Corporate Analyst, and a
Loss Control Manager) and increases in legal expense, accounting expense,
insurance expense, state franchise taxes and building maintenance expense.
INTEREST EXPENSE. Interest expense increased $1,183,000 or 66% for the nine
months ended September 30, 1998 compared to the nine months ended September 30,
1997, primarily as a result of increases in interest bearing debt incurred to
finance acquisitions.
OTHER INCOME. In connection with the acquisition of Philform, Inc. ("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. Other income for the nine months ended September 30, 1998,
includes $660,226 of equity in earnings of the limited partnership.
INCOME TAXES. The Company's effective tax rate was 38% for the nine months ended
September 30, 1998 and for the nine months ended September 30, 1997.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1998, the Company had
additional borrowing capacity under its line of credit of $9,175,000. The
Company's operations used cash of $7,611,000 during the nine months ended
September 30, 1998 compared to providing cash of $1,895,000 during the nine
months ended September 30, 1997. This change was primarily attributable to
increases in the working capital assets of Beaird and Ideal as a portion of
these companies' accounts receivable and all accounts payable and accrued
expenses were not acquired as part of the acquisition. Since acquisition, these
accounts have returned to normal operating levels.
Investing activities used cash of $7,517,000 for the nine months ended September
30, 1998 compared to $3,942,000 for the nine months ended September 30, 1997.
This increased use of cash was primarily attributable to increased acquisition
activity in 1998 compared to 1997 and purchases of property and equipment.
Financing activities provided cash of $13,451,000 for the nine months ended
September 30, 1998 compared to using cash of $982,000 for the nine months ended
September 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 C Warrant and one Class D Warrant. The
Company received net proceeds of $10,825,000 after deducting $210,000 of
expenses incurred in connection with the Offer.
At September 30, 1998, the Company had working capital of $24,755,000, long-term
debt of $45,776,000 and shareholders' equity of $64,827,000. 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.
YEAR 2000 COMPLIANCE
The Company is exposed to the risk that the year 2000 issue (the "Year 2000
Issue") could cause system failures or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During 1997, the Company undertook a corporate-wide initiative designed to
assess the impact of the Year 2000 Issue on software and hardware utilized in
the Company's operations, including information technology infrastructure ("IT")
and embedded manufacturing control technology ("Non-IT").
The Company's initiative is to be conducted in three phases: assessment,
implementation and testing. During the assessment phase, the Company completed a
comprehensive inventory of IT and Non-IT systems and equipment. Many of the
Company's IT systems include hardware and packaged software recently purchased
from large vendors who have represented that these systems are already year 2000
compliant. However, the Company has determined that it will be necessary to
modify portions of its financial and
14
<PAGE>
accounting software.
The Company believes that with modifications to its existing software, the Year
2000 Issue can be mitigated. The implementation of these remediation efforts is
underway and is expected to be completed by June 30, 1999. However, if such
modifications are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the Company's operations. The Company plans to
complete the testing of the year 2000 modifications as these modifications are
implemented. The Company has not established a contingency plan but intends to
formulate one to address unavoidable risks, and it expects to have the
contingency plan formulated by mid-1999.
The Company does not currently rely on the IT systems of other companies;
however, failure of the Company's suppliers or its customers to become Year 2000
compliant might have a material impact on the Company's operations. The Company
intends to continue to pursue an acquisition strategy; and as a result there can
be no assurance that the IT systems being used by an acquired company will be
compliant within the Year 2000 Issue or that any such conversion or failure to
convert an acquired system would not have an adverse effect on the Company.
The Company's efforts with respect to the Year 2000 Issue have been handled
internally by management and other Company employees. Costs of developing and
carrying out this initiative are being funded from the Company's operations and
have not represented a material expense to the Company. The Company has not
completed its assessment but currently believes that the costs of addressing the
Year 2000 Issue will not be significant and will not have a material adverse
impact on the Company's financial condition.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
On July 8, 1998, the Company filed its Report on Form 8-K announcing its merger
with UWS.
On July 14, 1998, the Company filed its Report on Form 8-K announcing the
acquisition of Beaird Industries, Inc. ("Beaird") from Trinity.
15
<PAGE>
On August 24, 1998, the Company filed its Report on Form 8-K announcing the
acquisition of A&B Bolt and Supply, Inc. ("A&B").
On August 24, 1998, the Company filed its Report on Form 8-K announcing the
acquisition of assets and assumption of certain liabilities of the Kirsch
Hardware and Components Business from Kirsch, Inc. The business will be operated
under the name Ideal Products.
On September 11, 1998, the Company amended its Report on Form 8-K to include the
pro forma and historical financial statements of Moores.
On September 14, 1998, the Company amended its Report on Form 8-K to include the
pro forma and historical financial statements of Beaird.
On September 14, 1998, the Company amended its Report on Form 8-K to include the
pro forma and historical financial statements of UWS.
On October 28, 1998, the Company amended its Report on Form 8-K to include the
pro forma and historical financial statements of A&B.
Item 15. Recent Sales of Unregistered Securities
In July 1998, in connection with the acquisition of Beaird from Trinity, the
Company issued a $5.3 million convertible debenture, convertible at $12.75 a
share into 416,667 of Company Common Stock.
In August 1998, in connection with the acquisition of A&B, the Company issued
808,081 shares of Common Stock valued at $6,000,000 to the former shareholders
of A&B.
In September 1998, for investment advisory services provided in connection with
an acquisiton, the Company issued 750,000 warrants to purchase IHI Common Stock
for $14 per share. These warrants were valued at $187,500.
16
<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: November 12, 1998 By: /S/CHRISTINE A. SMITH
Christine A. Smith,
Chief Financial Officer and
Vice President
17
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
SEPTEMBER 30, 1998
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ............................. $ 1,677 $ 1,515 $ 5,058 $ 4,014
Distributions to Shareholders .......... -- 34 34 150
---------- ---------- ---------- ----------
Income available to common
shareholders........................... 1,677 1,481 5,024 3,864
Effect of Dilutive Securities:
5% convertible debentures ............ 43 -- 43 --
---------- ---------- ---------- ----------
Income available to common
shareholders after assumed conversion . $ 1,720 $ 1,481 $ 5,067 $ 3,864
---------- ---------- ---------- ----------
Basic earnings per share
Weighted average common shares
outstanding - basic ............. 12,471 10,122 12,057 9,630
Basic earnings per share ............ $ .13 $ .14 $ .42 $ .40
========== ========== ========== ==========
Diluted earnings per share
Weighted average common
shares outstanding .................. 12,471 10,122 12,057 9,630
5% convertible debenture ............ 417 140
Shares issuable from assumed
conversion of common stock
options and warrants granted ...... 578 1000 589 861
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted ............... 13,466 11,122 12,786 10,491
========== ========== ========== ==========
Diluted earnings per share ............. $ .13 $ .13 $ .40 $ .36
========== ========== ========== ==========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 41,295,970
<ALLOWANCES> 0
<INVENTORY> 45,294,913
<CURRENT-ASSETS> 95,378,692
<PP&E> 56,727,060
<DEPRECIATION> 0
<TOTAL-ASSETS> 184,292,743
<CURRENT-LIABILITIES> 70,624,013
<BONDS> 0
0
0
<COMMON> 129,810
<OTHER-SE> 64,697,357
<TOTAL-LIABILITY-AND-EQUITY> 184,292,743
<SALES> 143,585,292
<TOTAL-REVENUES> 143,585,292
<CGS> 108,191,575
<TOTAL-COSTS> 108,191,575
<OTHER-EXPENSES> 25,671,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,974,047
<INCOME-PRETAX> 8,122,092
<INCOME-TAX> 3,063,498
<INCOME-CONTINUING> 5,058,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,058,594
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
