================================================================================
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, 1999
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
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
76-0289495
(IRS EMPLOYER
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, 1999, there were 15,111,094 shares of Common Stock
outstanding.
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<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 as restated 1
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 as restated 2
Consolidated Statements of Operations for the nine months
ended September 30,1999 and 1998 as restated 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 as restated 4
Notes to 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 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities and Use of Proceeds (no response
required) 20
Item 3. Defaults upon Senior Securities
(no response required) 20
Item 4. Submission of Matters to a Vote of
Security Holders (no response required) 20
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................................. $ 264,819 $ 3,412,411
Accounts receivable - trade, net ..................................... 37,268,107 45,577,133
Costs and estimated earnings in excess of billings ................... 9,930,782 5,428,987
Employee advances .................................................... 59,397 58,823
Inventories .......................................................... 40,122,301 48,275,927
Notes receivable, current portion .................................... 2,913,829 4,364,106
Other current assets ................................................. 4,596,600 4,620,337
------------- -------------
Total current assets ........................................... 95,155,835 111,737,724
Property and equipment, net .............................................. 65,569,968 58,793,946
Notes receivable, less current portion ................................... 1,577,422 1,783,769
Investment in unconsolidated affiliates .................................. 5,233,854 513,284
Other assets ............................................................. 8,023,835 3,365,494
Goodwill and other, net .................................................. 26,880,791 27,474,438
------------- -------------
Total assets ..................................................... $ 202,441,705 $ 203,668,655
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current ............................................. $ 46,198,000 $ 42,486,422
Accounts payable - trade ........................................... 19,994,314 21,628,422
Billings in excess of costs and estimated earnings ............... 1,039,760 5,165,760
Accrued expenses and other ......................................... 11,554,831 9,673,640
Current portion of long-term debt .................................. 47,628,068 23,547,890
------------- -------------
Total current liabilities ..................................... 126,414,973 102,502,134
Long-term debt, less current portion ..................................... 6,477,713 30,334,166
Deferred compensation payable, less current portion ...................... 270,927 216,021
Deferred income taxes payable ............................................ 4,704,166 4,703,534
------------- -------------
Total liabilities ............................................ 137,867,779 137,755,855
------------- -------------
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, 15,111,094 and 14,739,662
shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively .................................... 151,110 147,396
Additional paid-in capital ............................................ 54,200,383 51,545,271
Retained earnings ..................................................... 11,167,433 15,165,133
Notes receivable from officers ........................................ (945,000) (945,000)
------------- -------------
Total shareholders' equity ................................. 64,573,926 65,912,800
------------- -------------
Total liabilities and shareholders' equity ................. $ 202,441,705 $ 203,668,655
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales ........................................................ $ 54,831,576 $ 63,569,837
Cost of sales ................................................ 47,444,249 50,192,161
------------ ------------
Gross profit ................................................. 7,387,327 13,377,676
Selling, general and administrative expenses ................. 17,490,710 10,291,816
------------ ------------
Income (loss) from operations ................................ (10,103,383) 3,085,860
Equity in earnings of unconsolidated affiliates .............. 162,864 271,533
Other income (expense):
Interest expense ....................................... (2,320,059) (1,657,654)
Interest income ........................................ 75,388 162,195
Other income, net ..................................... 363,619 391,101
------------ ------------
Total other income (expense) ................. (1,881,052) (1,104,358)
------------ ------------
Income (loss) before income taxes ............................ (11,821,571) 2,253,035
Provision (benefit) for income taxes ......................... (4,589,419) 833,436
------------ ------------
Net income (loss) ............................................ (7,232,152) 1,419,599
============ ============
Basic earnings (loss) per share .............................. $ (0.48) $ 0.10
============ ============
Diluted earnings (loss) per share ............................ $ (0.48) $ 0.09
============ ============
Weighted average number of common shares
outstanding - basic ....................................... 15,111,095 14,183,026
Weighted average number of common shares
outstanding - diluted ..................................... 15,111,095 15,177,044
</TABLE>
See notes to unaudited consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Sales ........................................................ $ 196,065,030 $ 151,260,550
Cost of sales ................................................ 160,187,333 114,549,548
------------- -------------
Gross profit ................................................. 35,877,697 36,711,002
Selling, general and administrative expenses ................. 38,940,704 27,602,333
------------- -------------
Income (loss) from operations ................................ (3,063,007) 9,108,669
Equity in earnings of unconsolidated affiliates .............. 1,493,517 1,110,362
Other income (expense):
Interest expense ....................................... (6,256,594) (3,340,769)
Interest income ........................................ 234,130 367,414
Other income, net ..................................... 1,246,398 1,213,399
------------- -------------
Total other income (expense) ..................... (4,776,066) (1,759,956)
------------- -------------
Income (loss) before income taxes ............................ (6,345,556) 8,459,075
Provision (benefit) for income taxes ......................... (2,347,856) 3,208,753
------------- -------------
Net income (loss) ............................................ (3,997,700) 5,250,322
Distributions to shareholders ................................ 34,297
------------- -------------
Net income (loss)available to common shareholders ............ $ (3,997,700) $ 5,216,025
============= =============
Basic earnings (loss) per share .............................. $ (0.27) $ 0.38
============= =============
Diluted earnings (loss) per share ............................ $ (0.27) $ 0.36
============= =============
Weighted average number of common shares
outstanding - basic ....................................... 14,905,162 13,767,776
Weighted average number of common shares
outstanding - diluted ..................................... 14,905,162 14,496,765
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................... $ (3,997,700) $ 5,250,322
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ......................................... 5,712,211 3,898,441
Equity in earnings of unconsolidated affiliates ..................... (1,493,517) (1,110,362)
Deferred income tax provision ......................................... 632 161,514
Deferred compensation ................................................. 54,906 (19,103)
Deferred gain on demolition contract .................................. (750,000) (750,000)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ............................................... 8,309,026 (4,037,130)
Employee advances ................................................. (574) 107,090
Inventories ....................................................... 7,628,626 (5,298,891)
Notes receivable .................................................. 1,656,624 (3,591,890)
Other assets ...................................................... (12,357,721) (5,502,133)
Accounts payable .................................................. (1,634,108) 1,025,309
Accrued expenses and other ........................................ (3,194,809) 2,205,801
------------ ------------
Net cash provided by (used in) operating activities ........... (66,404) (7,661,032)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ......................................... (7,952,310) (6,959,060)
Proceeds from disposals of property and equipment, net ..................... 441,546 200,462
Distributions received from unconsolidated affiliates ...................... 2,397,353
Investments in unconsolidated affiliates ................................... (2,477,053) (479,389)
Net proceeds from sale of interest in
demolition contract ..................................................... 2,000,000
Business acquisitions, net of cash acquired ................................ (3,140,012)
------------ ------------
Net cash used in investing activities ......................... (9,987,817) (5,980,646)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving line of credit .............................. 3,711,578 4,468,200
Proceeds from the issuance of long-term debt ............................... 6,193,532 3,090,877
Principal payments on notes payable and long-term debt ..................... (5,657,307) (8,399,943)
Proceeds from issuance of common stock ..................................... 2,658,826 12,825,015
Distributions to shareholders .............................................. (34,297)
------------ ------------
Net cash provided by financing activities ............................. 6,906,629 11,949,852
------------ ------------
Net increase (decrease) in cash and equivalents ............................... (3,147,592) (1,691,826)
Cash and equivalents, beginning of period ..................................... 3,412,411 1,725,053
------------ ------------
Cash and equivalents, end of period ........................................... $ 264,819 $ 33,227
============ ============
Supplemental disclosures for cash flow information: Cash paid for:
Interest .................................................... $ 6,453,774 $ 1,700,768
Taxes ....................................................... 364,000 2,202,486
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
1. 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 three
and nine month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto of the Company as of
December 31, 1998 and 1997 and for the three-year period ended
December 31, 1998 included in the Current Report on Form 8-K dated
August 17, 1999. Certain amounts have been reclassified from previous
periods to conform to the current period presentation.
2. DEBT
As of September 30, 1999, the Company had an aggregate of $100.3
million borrowed under our principal bank credit facility and debt
instruments entered into or assumed in connection with acquisitions as
well as other bank financings. Our existing credit facility is a
revolving line of credit with Comerica Bank-Texas. The principal
amount is the lesser of $55 million or a defined borrowing base.
Advances under the revolving line of credit bear interest, at the
Company's option, at either (i) the prime rate in effect at the time
of the advance (which was 8.25% at September 30, 1999) or (ii) an
adjusted Eurodollar rate plus an amount ranging from 2% to 2 3/4%
based upon our ratios of senior debt to EBITDA. The borrowing base is
defined as 80% of eligible accounts receivable and 50% of eligible
inventory subject to certain limitations. At September 30, 1999, the
borrowing capacity under the credit facility was $47.8 million and
availability was $1.5 million. The revolving line of credit matures on
June 16, 2001. The Company has notes payable to a financial
institution maturing December 2003 and October 2004 with interest at
Libor plus 2.5% secured by certain equipment of the Company.
Additionally, the Company has a $15 million note maturing November 30,
1999. Certain of the Company's debt arrangements contain requirements
as to the maintenance of minimum levels of working capital and net
worth, minimum ratios of debt to cash flow, cash flow to certain fixed
charges, liabilities to tangible net worth, current ratio, and capital
expenditures. At September 30, 1999, the Company was not in compliance
with several of these covenants. Because of the losses incurred, the
Company did not meet certain required levels of working capital and
net worth, ratios of debt to cash flow, cash flow to certain fixed
charges, liabilities to tangible net worth and current ratio as
required by our debt agreements. Additionally, we do not anticipate
being in compliance with these covenants at December 31, 1999 absent
modification from the specific lenders. For the period ended September
30, 1999, we have not received waivers for these covenant violations,
and as a result, we have classified these long-term obligations as
current in the accompanying consolidated balance sheet. Although the
lenders have not expressed an intent to do so, they have the ability
to accelerate repayment of these obligations. The lenders have
verbally indicated under certain conditions a willingness to refinance
our indebtedness including extending the maturity of
5
<PAGE>
the $15 million note and amending the existing covenants; however, no
assurance can be given that we will be able to conclude any such
arrangement.
The Company's liquidity has been constrained by our borrowing base
limitations and by our operating losses and as a result our financial
position and cash flows have been adversely affected. We have
experienced an increase in our accounts payable at September 30, 1999
as compared to those in prior periods. We are currently exploring
various alternatives to improve the Company's liquidity, including
negotiating with our lenders to refinance our indebtedness. In
addition, the Company has identified and is pursuing the sale of
non-strategic assets as well as raising additional debt and equity
capital.
In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird")
from Trinity Industries, Inc. (the "Seller") for $28.0 million in cash
and a $5.0 million note to the Seller. Under the purchase agreement
the Seller assumed all liabilities and retained certain accounts
receivable of Beaird. The Company believes that it is entitled to
receive $2.2 million of excess purchase price paid to the Seller under
the purchase agreement resulting from liabilities incurred by the
Company in connection with the acquisition. Additionally, on July 15,
1999, the first installment was due on the Seller note of $1.8
million. It is the Company's position that it has offset the amount
owed it under the purchase agreement against this principal and
interest payment. Although the Seller agrees that the Company is owed
an amount, that amount is not sufficient to pay the first principal
and interest payment and additionally cannot be offset against the
note payment. The Company and the Seller are in discussions to resolve
this disagreement. The principal payment is classified as current
portion of long-term debt at September 30, 1999.
3. INVENTORIES
Inventories consists of the following:
SEPTEMBER30, DECEMBER 31,
1999 1998
----------- -----------
Raw materials ............. $10,928,627 $12,451,960
Finished goods ............ 21,600,350 25,373,644
Other ..................... 7,593,324 10,450,323
----------- -----------
$40,122,301 $48,275,927
=========== ===========
4. REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the
strategic operating units under which the Company sells various types
products and services to various customers. Financial information for
purchase transactions are included in the segment disclosures only for
periods subsequent to the dates of acquisition. The Company evaluates
performance based on income from operations excluding certain
corporate costs not allocated to the segments. Intersegment sales are
not material. Substantially all sales are from domestic sources and
all assets are held in the United States.
6
<PAGE>
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION VALVES MACHINES CORPORATE CONSOLIDATED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED:
SEPTEMBER 30, 1999
Sales .................................... $ 30,290 $ 12,428 $ 9,693 $ 2,421 $ $ 54,832
Income (loss) fro m operations ........... (966) (5,097) (1,191) (228) (2,621) (10,103)
SEPTEMBER 30, 1998
Sales .................................... 27,976 19,020 13,994 2,580 63,570(1)
Income (loss) from operations ............ 1,348 1,045 1,170 (16) (461) 3,086(1)
FOR THE NINE MONTHS ENDED:
SEPTEMBER 30, 1999
Sales .................................... 94,920 64,148 32,384 4,613 196,065
Income (loss) from operations ............ 1,996 (3,937) 3,242 (611) (3,753) (3,063)
SEPTEMBER 30, 1998
Sales .................................... 72,821 19,020 47,342 12,078 151,261(1)
Income (loss) from operations ............ 5,163 1,045 3,973 29 (1,101) 9,109(1)
AS OF SEPTEMBER 30, 1999
Total assets ............................. 103,013 46,073 39,733 3,403 10,220 202,442
AS OF DECEMBER 31, 1998
Total assets ............................. 106,247 58,427 31,531 3,969 3,495 203,669(1)
</TABLE>
(1) As Restated - see Note 6
5. EARNINGS PER SHARE
The following table presents information necessary to calculate basic
and diluted earnings per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998(1)
------------ ------------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income (loss) .................................................. $ (7,232,152) $ 1,419,599
Distributions to shareholders
------------ ------------
Net income (loss) available for common shareholders - basic ........ (7,232,152) 1,419,599
Interest on convertible debt securities, net of tax ................ 43,828
------------ ------------
Net income (loss) available for common shareholders - diluted ...... $ (7,232,152) $ 1,463,427
============ ============
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding ......................... 15,111,095 14,183,026
============ ============
Basic earnings (loss) per share .................................... $ (0.48) $ 0.10
============ ============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE (2)
Weighted average common shares outstanding ........................ 15,111,095 14,183,026
Shares issuable from assumed conversion of common
share options, warrants granted and debt conversion ............... 994,018
----------- -----------
Weighted average common shares outstanding, as adjusted ........... 15,111,095 15,177,044
=========== ===========
Diluted earnings (loss) per share ................................. $ (0.48) $ 0.09
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998(1)
------------ ------------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income (loss) .................................................. $ (3,997,700) $ 5,250,322
Distributions to shareholders ...................................... 34,297
------------ ------------
Net income (loss) available for common shareholders - basic ........ (3,997,700) 5,216,025
Interest on convertible debt securities, net of tax ................ 43,828
------------ ------------
Net income (loss) available for common shareholders - diluted ...... (3,997,700) 5,259,853
============ ============
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding ......................... 14,905,162 13,767,776
============ ============
Basic earnings (loss) per share .................................... $ (0.27) $ 0.38
============ ============
DILUTED EARNINGS (LOSS) PER SHARE (2)
Weighted average common shares outstanding ......................... 14,905,162 13,767,776
Shares issuable from assumed conversion of common
share options, warrants granted and debt conversion ................ 728,989
------------ ------------
Weighted average common shares outstanding, as adjusted ............ 14,905,162 14,496,765
============ ============
Diluted earnings (loss) per share .................................. $ (0.27) $ 0.36
============ ============
</TABLE>
(1) As Restated - see Note 6
(2) Due to the reported loss in 1999, all assumed
conversions would be anti-dilutive
6. ACQUISITIONS
In January 1999, the Company acquired all the outstanding capital
stock of Blastco for 1,711,027 shares of the Company's common stock,
upon merger of a wholly owned subsidiary of the Company with and
into Blastco, with Blastco being the surviving corporation. As a
result, Blastco became a wholly owned subsidiary of the Company.
Blastco, headquartered in Midland, Texas, demolishes refineries.
The merger with Blastco was accounted for as a pooling-of-interests.
The Company's consolidated statements of operations for the three
months and the nine months ended September 30, 1998 have been
restated to include the results of operations of Blastco. The
Company's consolidated statements of income for the three months and
the nine months ended September 30, 1999 include the results of
operations of Blastco for the period.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing businesses whose products include metal fasteners, medium and
thick-walled heavy pressure vessels, high pressure industrial valves and related
products and services. Operations are organized into three core business
segments: (i) fastener manufacturing; (ii) heavy fabrication; and (iii) valve
manufacturing and repair. Through a fourth segment, we also distribute machine
tools and provide export crating services.
This section should be read in conjunction with our unaudited consolidated
financial statements included elsewhere in this document.
Our historical financial statements have been restated for 1998 periods
presented to include the results of operations from each of the companies that
were acquired in acquisitions accounted for under the pooling-of-interests
method. The results of operations for companies acquired in acquisitions
accounted for under the purchase method are included in our historical financial
statements from the date of such acquisition. Since these "purchase"
acquisitions were consummated at various times during 1998, the financial
information contained herein with respect to each fiscal period does not fully
reflect the results of operations that would have been achieved had these
acquisitions been consummated at the beginning of the periods presented or which
may be achieved in the future. In connection with each "purchase" acquisition,
we have recorded goodwill to the extent the purchase price exceeded the fair
market value of the specific assets acquired, which is generally amortized over
20 years.
Our results of operations are affected by the level of economic activity
in the industries served by our customers, which in turn may be affected by
other factors, including the level of economic activity in the U.S. and foreign
markets they serve. The principal industries served by our clients are the
automotive, home furnishings, petrochemical and oil and gas industries. During
1998 and into 1999, oil and gas prices declined significantly, resulting in a
decrease in the demand for our products and services that are used in the
exploration and production of oil and gas. Exploration and production
expenditures generally lag improvements in oil and gas prices; therefore,
although oil and gas prices have improved during 1999, we have yet to experience
significant sales increases.
9
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Sales: (000'S OMITTED) (000'S OMITTED)
--------------- ---------------
<S> <C> <C> <C> <C>
Fastener Segment .......................... $ 30,290 $ 27,976 $ 94,920 $ 72,821
Heavy Fabrication Segment (1) ............. 12,428 19,020 64,148 19,020
Valve Segment ............................. 9,693 13,994 32,384 47,342
Machine Segment ........................... 2,421 2,580 4,613 12,078
--------- --------- --------- ---------
54,832 63,570 196,065 151,261
Cost of Sales:
Fastener Segment .......................... 23,398 21,400 73,167 54,247
Heavy Fabrication Segment (1) ............. 13,076 16,374 60,115 16,375
Valve Segment ............................. 8,791 10,349 23,089 33,761
Machine Segment ........................... 2,179 2,069 3,816 10,167
--------- --------- --------- ---------
47,444 50,192 160,187 114,550
Selling, General and Administrative:
Fastener Segment .......................... 7,857 5,227 19,757 13,411
Heavy Fabrication Segment (1) ............. 4,449 1,600 7,969 1,600
Valve Segment ............................. 2,092 2,476 6,053 9,608
Machine Segment ........................... 471 527 1,409 1,881
Corporate ................................. 2,622 462 3,753 1,102
--------- --------- --------- ---------
17,491 10,292 38,941 27,602
--------- --------- --------- ---------
Operating Income (loss) ........................ $ (10,103) $ 3,086 $ (3,063) $ 9,109
========= ========= ========= =========
</TABLE>
(1) The Heavy Fabrication Segment is comprised solely of Beaird Industries
which was acquired July 1, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998.
SALES. On a consolidated basis, sales decreased $8.7 million or 14% for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998.
Fastener Segment sales increased $2.3 million or 8% for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998. This
increase was primarily attributable to the acquisitions of Ideal Products and
A&B Bolt and Supply, Inc., in August of 1998 which added $3.5 million in sales
in the third quarter of 1999, partially offset by a $1.2 million aggregate sales
decrease in our stud bolt, rivet and gasket operations primarily related to
depressed activity in the oil and gas industries and a softness in the refining
and processing industries.
Heavy Fabrication Segment sales for the three month period ending September 30,
1999 decreased $6.6 million or 35% compared to the third quarter of 1998. A
substantial percentage of this segment's revenues are derived from customers in
the hydrocarbon processing industry. Because of the volatile oil feedstock
prices during 1999, the customers of this segment saw a reduction in their
profit margins and have materially reduced their capital spending. In addition,
heavy competitive pressure from overseas, particularly Korean competitors, has
substantially reduced
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backlog as we are unable to match the low bids submitted by these competitors.
Due to the highly competitive market and the downturn in spending in the primary
industry we serve, we anticipate revenues for this segment will decline further
in the fourth quarter of 1999 and first quarter of 2000.
Valve Segment sales decreased $4.3 million or 31% for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998. This
decrease was primarily attributable to a decrease in sales volume resulting from
reductions in the worldwide rig count, continued caution regarding the long-term
hydrocarbon price environment, consolidation within the oil and gas industry and
ongoing cost reduction efforts by oil and gas companies. Increasing worldwide
demand for oil and gas coupled with declining production in many areas should
support a more stable and favorable level of oil and gas prices in the future,
resulting in increased exploration and production spending in 2000 and an
improved demand for oilfield services.
Machine Segment sales decreased $0.2 million or 6% for the three months ended
September 30, 1999 compared to the three months ended September 30,1998 as the
demand for machine tools declined in the energy industry as a result of the
factors mentioned in the Valve Segment discussion above.
COST OF SALES. Cost of sales decreased $2.7 million or 6% for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
Cost of sales as a percentage of sales was 87% for the third quarter of 1999
compared to 79% for the third quarter of 1998.
Fastener Segment cost of sales increased $2.0 million or 9% for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998,
primarily as a result of the addition of the two companies in August 1998 as
described in sales above. Cost of sales as a percentage of sales was 78% for the
third quarter of 1999 compared to 76% for the comparable period in 1998. The
increase in costs as a percentage of sales was primarily the result of the
closing of our Waterbury, Connecticut and El Paso, Texas manufacturing
facilities and the write off of certain excess inventory amounts.
Heavy Fabrication Segment cost of sales decreased $3.3 million or 20% for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998 as a result of the decrease in sales. The decrease in cost of
sales related to the decline in sales volume but was partially offset by
declining margins. Cost of sales as a percentage of sales was 105% for the three
months ended September 30, 1999 compared to 86% for the same period in 1998.
Margins declined in 1999 as we were forced to lower our contract values in
response to the competitive pressures mentioned in relation to the decline in
sales. In addition, we recorded approximately $371,000 in costs associated with
personnel reductions as we responded to the decline in sales volume.
Valve Segment cost of sales decreased $1.6 million or 15% primarily as a result
of the decrease in sales described above. Cost of sales as a percentage of sales
was 91% for the third quarter 1999 compared to 74% for the third quarter in
1998. Margins decreased in the oilfield related businesses, especially in parts
and equipment sales, as competition in this market intensified due to the
reasons discussed in relation to sales decreases. In addition, we discontinued
certain product offerings and wrote off related inventories resulting in charges
of approximately $180,000 during the third quarter of 1999.
Machine Segment cost of sales increased $0.1 million or 5% due to the incurrence
of $300,000 in costs related to the liquidation of inventory resulting from the
closure of a used equipment sales subsidiary . Cost of sales as a percentage of
sales was 88% for the three months ended September 30, 1999 compared to 80% for
the same period in 1998. Without the charges associated with the business
closure margins would have been comparable for the third quarter of 1999 and the
third quarter of 1998.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.2 million or 70% for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998. The
increase is primarily attributable to i) approximately $1.8 million in costs
incurred due to the closing and consolidation of the Waterbury, Connecticut and
El Paso, Texas manufacturing facilities and the consolidation of the production
into other facilities along with severance costs associated with personnel
reductions at various facilities, ii) a provision of $2.5 million for
uncollectible receivables associated with a dispute with a major customer in the
heavy fabrication segment, iii)$1.6 million in expenses incurred in relation to
a high yield bond offering aborted in the current quarter, and iv) the inclusion
in 1999 of a full quarter of expense for Ideal and A&B Bolt which were acquired
August 1, 1998. In addition, we incurred professional fees related to
productivity consultants at Beaird and increased provisions for bad debt due to
the difficulties being experienced by our customers in the upstream energy
market.
Fastener Segment selling, general and administrative expenses increased $2.6
million or 50% primarily as a result of the closing and consolidation costs and
acquisitions described above.
Heavy Fabrication Segment selling, general and administrative expenses increased
$2.8 million or 178% primarily in relation to the provision for bad debt and
professional fees described above.
Valve Segment selling, general and administrative expenses decreased $0.4
million or 16%. This decrease was the result of personnel reductions and
reductions in other general and administrative expenses in response to decreases
in sales. The reductions were partially offset by an increase in provisions for
bad debt in this segment and severance costs associated with the termination of
administrative personnel.
Machine Segment selling, general and administrative expenses decreased $0.1
million or 11% primarily as a result of cost reduction measures implemented due
to the decreases in sales described above.
Corporate selling, general and administrative expenses increased $2.2 million or
468%. This increase was primarily attributable to the costs associated with the
aborted debt offering described above and personnel additions and increases in
professional fees associated with our growth.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES. On a consolidated basis,
earnings from equity investments in unconsolidated affiliates decreased $0.1
million or 40%. The decrease is primarily as the result of the company's
investment in one affiliate which is engaged in the demolition of refineries.
This affiliate reported lower earnings in the third quarter of 1999 compared to
the same period in 1998 due primarily to the timing of scrap sales which
contribute significantly to profitability but which occur on a sporadic basis.
Because of declining scrap prices in the third quarter the partnership elected
to forego scrap sales in anticipation of an improving market.
INTEREST EXPENSE. Interest expense increased $0.7 million or 40% for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998, primarily as a result of $20.6 million in debt assumed or incurred in
connection with acquisitions in the third quarter of 1998, the increase in the
interest rate from Libor plus 5% to Libor plus 10% on a $15.0 million note with
a lender, and a higher average balance outstanding on our line of credit with
our bank during the third quarter of 1999 as compared with the same period in
1998.
OTHER INCOME. On a consolidated basis, other income was $0.4 million for the
three months ended September 30, 1999. Other income for the third quarter
consisted primarily of $0.3 million recognized as deferred gain on the sale of a
demolition contract in the first quarter of 1998 and $0.1 million in rental
payments for real estate and equipment from one of our equity affiliates.
INCOME TAXES. Income tax expense decreased $5.4 million or 651% for the third
quarter of 1999 compared to the third quarter of 1998. Our effective tax rate
was 39% for the three
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months ended September 30, 1999 and 37% for the three months ended September 30,
1998. The increase in the effective tax rate is primarily the result of state
taxes associated with the purchase acquisitions in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998.
SALES. On a consolidated basis, sales increased $44.8 million or 30% for the
nine months ended September 30, 1999 compared to the nine months ended September
30, 1998.
Fastener Segment sales increased $22.1 million or 30% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. This
increase was primarily attributable to the acquisitions of Ideal Products and
A&B Bolt and Supply, Inc. in the third quarter of 1998 which added $27.1 million
in sales in the nine months ended September 30, 1999 compared to the same period
in 1998. The increase was partially offset by a $5.0 million aggregate sales
decrease in our stud bolt, rivet and gasket operations primarily related to
depressed activity in the oil and gas industries and a decline in spending in
the refining and processing industries related to reductions in our customers
profit margins resulting from increases in their feedstock prices.
The Heavy Fabrication Segment was formed July 1, 1998 with the acquisition of
Beaird. Under the purchase method of accounting, no sales were recorded relating
to this segment prior to the third half of 1998. Sales for the nine month period
ending September 30, 1999 increased $13.7 million or 27% compared to the first
nine months of 1998 (inclusive of six months sales prior to our ownership).
Sales increased based on a strategic decision to expand the range of products
manufactured, primarily to the production of wind turbine towers. Beaird's
primary contract for wind turbine towers required delivery of the towers on or
before June 30, 1999. Therefore, substantially all of the sales related to these
towers were recognized prior to July 1, 1999. The manhours associated with the
completed wind turbine tower contract have not been replaced as of September 30,
1999. Additionally, a substantial percentage of this segment's revenues are
derived from customers in the hydrocarbon processing industry. Because of the
volatile oil feedstock prices during 1999, the customers of this segment saw a
reduction in their profit margins and have materially reduced their capital
spending. In addition, heavy competitive pressure from overseas, particularly
Korean competitors, has substantially reduced backlog as we are unable to match
the low bids submitted by these competitors. Due to the highly competitive
market and the downturn in spending in the primary industry we serve, we
anticipate revenues for this segment will decline in the fourth quarter of 1999
and through at least the first quarter of 2000.
Valve Segment sales decreased $15.0 million or 32% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. This
decrease was primarily attributable to a decrease in sales volume resulting from
reductions in the worldwide rig count, continued caution regarding the long-term
hydrocarbon price environment, consolidation within the oil and gas industry and
ongoing cost reduction efforts by oil and gas companies. Increasing worldwide
demand for oil and gas coupled with declining production in many areas should
support a more stable and favorable level of oil and gas prices in the future,
resulting in increased exploration and production spending in 2000 and an
improved demand for oilfield services.
Machine Segment sales decreased $7.5 million or 62% for the nine months ended
September 30, 1999 compared to the nine months ended June 30,1998 as the demand
for machine tools declined in the energy industry due to the factors described
in the Valve Segment disclosure above.
COST OF SALES. Cost of sales increased $45.6 million or 40% for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
Cost of sales as a percentage of sales was 82% for the first nine months of 1999
compared to 76% for the first nine months of 1998. Cost of sales as a percentage
of sales was higher on a consolidated basis for a number of reasons. The
addition, in July 1998, of the heavy fabrication segment, which typically has
lower gross margins on its large contract business in comparison to our other
segments negatively impacted consolidated margins. The valve segment, which
typically has the highest margins of all our segments, represented a smaller
percentage of total sales excluding the heavy fabrication segment (25% in the
first nine months
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of 1999 compared to 36% in the first nine months of 1998). Additionally, margins
in the valve segment, fastener segment and heavy fabrication segment are down as
competition for shrinking sales volumes in the energy related industries (as
discussed above) places downward pressure on sales prices.
Fastener Segment cost of sales increased $18.9 million or 35% for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998, primarily as a result of the increased sales related to the addition of
A&B and Ideal described above. Cost of sales as a percentage of sales was 77%
for the first nine months of 1999 compared to 74% for the comparable period in
1998 as a result of management and production changes, including planned
reductions in inventory at two of our facilities. Additionally, several large
sales were made during 1999 that had lower than average margins resulting from
lower negotiated pricing, acceptable due to the high volume. In addition, cost
of sales increased as a result of the write off of inventory in association with
the closing of our Waterbury, Connecticut and El Paso, Texas manufacturing
facilities.
Heavy Fabrication Segment cost of sales as a percentage of sales was 94% for the
nine months ended September 30, 1999 compared to 86% for the three months ended
September 30, 1998 (this segment was purchased effective July 1, 1999). Gross
margin was adversely affected by the aftermath of the labor negotiations which
concluded in November 1998. The backlog created during the negotiation process
was still being cleared in the first half of 1999 and this, along with the
increase in volume associated with the wind turbine tower product addition,
resulted in higher than usual overtime and outsourcing costs. Margins also
decreased as we were forced to lower our contract values in response to the
competitive pressures mentioned in relation to the decline in sales. In
addition, we recorded approximately $377,000 in costs associated with personnel
reductions in the third quarter as we responded to the decline in sales volume.
Valve Segment cost of sales decreased $10.7 million or 32% primarily as a result
of the decrease in sales described above. Cost of sales as a percentage of sales
was 71% for the first nine months of 1999 and 1998. For the first six months of
1999, cost of sales as a percent of sales decreased because as sales increased,
the valve companies reduced their workforce and were able to eliminate overtime
and outsourcing of production and due to the growth (both in actual sales and as
a percentage of total valve segment sales) of higher margin contracts associated
with refinery demolition. However, in the third quarter of 1999, margins
decreased in the oilfield related businesses, especially in parts and equipment
sales, as competition in this market intensified due to the reasons discussed in
relation to sales decreases. In addition, we discontinued certain product
offerings and wrote off related inventories at one of our subsidiaries
resulting in charges of approximately $180,000 during the third quarter of 1999.
Machine Segment cost of sales decreased $6.4 million or 63% as a result of the
decrease in sales described above. Cost of sales as a percentage of sales was
83% for the nine months ended September 30, 1999 compared to 86% for the same
period in 1998. Sales related to export crating represented 29% of total sales
for the first nine months of 1999 compared to 24% in the first nine months of
1998. Gross margins have historically been higher for crating compared to
machine sales. The increase in margin due to sales mix was partially offset due
to the incurrence of $300,000 in costs in the third quarter of 1999 related to
the liquidation of inventory resulting from the closure of a used equipment
sales subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.3 million or 41% for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. The
increase is primarily the result of i) approximately $1.8 million in costs
incurred due to the closing of the Waterbury, Connecticut and El Paso, Texas
manufacturing facilities and the consolidation of the production into other
facilities along with severance costs associated with personnel reductions at
various facilities, ii) a provision of $2.5 million for uncollectible
receivables associated with a dispute with a major customer in the heavy
fabrication segment, iii)$1.6 million in expenses incurred in relation to high
yield bond offering aborted in the third quarter, and iv) the fact that 1999
included a full nine months of expense for Beaird, Ideal and A&B Bolt which were
acquired in the third quarter of 1999. In addition, we incurred professional
fees related to productivity consultants at Beaird and increased provisions for
bad debt at various subsidiaries due to the difficulties being experienced by
our customers in the upstream energy market. These increases were partially
offset by deliberate cost reduction measures implemented as a result of the
decrease in sales.
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Fastener Segment selling, general and administrative expenses increased $6.3
million or 47% primarily as a result of the acquisitions described above.
Heavy Fabrication Segment selling, general and administrative expenses increased
$6.4 million or 398% for the nine months ended September 30, 1999 as compared to
the three months ended September 30, 1999 (Beaird was purchased effective July
1, 1999) . The third quarter of 1999 included $2.5 million in expense for a
provision for bad debt related to a customer dispute and professional fees
associated with productivity consultants. Selling, general and administrative
costs without the provision and professional fees were comparable to the
historical amounts for the nine months ended September 30, 1998 (including
expense incurred prior to the acquisition of Beaird).
Valve Segment selling, general and administrative expenses decreased $3.6
million or 37%. This decrease was the result of the elimination of the salary
and related expenses of the president of a company who resigned in connection
with the acquisition of that company, which was accounted for under the
pooling-of-interests method of accounting, other personnel reductions, and
reductions in other general and administrative expenses in response to decreases
in sales.
Machine Segment selling, general and administrative expenses decreased $0.5
million or 25% primarily as a result of cost reduction measures implemented due
to the decreases in sales described above.
Corporate selling, general and administrative expenses increased $2.7 million or
241%. This increase was attributable to the $1.6 million in expenses incurred in
relation to a high yield bond offering aborted in the third quarter of 1999 and
personnel additions and increases in professional fees associated with our
growth.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES. On a consolidated basis,
earnings from equity investments in unconsolidated affiliates increased $0.4
million or 35%, primarily as the result of the company's investment in one
affiliate which is engaged in the demolition of refineries and that did not have
significant activity until the third quarter of 1998.
INTEREST EXPENSE. Interest expense increased $2.9 million or 87% for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998, primarily as a result of $57.7 million in debt assumed or incurred in
connection with acquisitions in the third quarter of 1998.
OTHER INCOME. On a consolidated basis, other income was $1.2 million for the
nine months ended September 30, 1999, primarily consisting of $0.8 million in
deferred gain recognition on the sale of a demolition contract, $0.3 million in
rental payments for real estate and equipment from one of our equity affiliates
and $0.1 million related to gains on the disposals of assets.
INCOME TAXES. Income tax expense decreased $5.6 million or 173% for the first
nine months of 1999 compared to the first nine months of 1998. Our effective tax
rate was 37% for the nine months ended September 30, 1999 and 38% for the nine
months ended September 30, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had current maturities of long-term debt of $47.6
million, long term debt of $6.5 million, a line of credit due June 2001 of $46.2
million and shareholders' equity of $64.6 million. At September 30, 1999, our
current liabilities exceeded our current assets due to the classification of our
long-term debt in default as current as a result of our lenders ability to
accelerate repayment of these obligations. Historically, our principal liquidity
requirements and uses of cash have been for debt service, capital expenditures,
working capital and acquisition financing, and our principal sources of
liquidity and cash have been from cash flows from operations, borrowings under
long-term debt arrangements and issuances of equity securities. We have financed
acquisitions through bank borrowings, issuances of equity securities and
internally generated funds.
The Company's liquidity has been constrained by our borrowing base limitations
and by our operating losses and as a result our financial position and cash
flows have been adversely affected. We have experienced an increase in our
accounts payable at September 30, 1999 as compared to those in prior periods. We
are currently exploring various alternatives to improve the Company's liquidity,
including negotiating with our lenders to refinance our indebtedness. In
addition, the Company has identified and is pursuing the sale of non-strategic
assets as well as raising additional debt and equity capital.
During the quarter ended September 30, 1999, we undertook an initiative to
integrate and align our operations by industry segment. This initiative was a
result of our rapid expansion during the prior two years, as well as in response
to the downturn in the oil and gas industry. This initiative included closure of
duplicate facilities, reductions in personnel, the elimination of certain
products and write off of the related inventory and the adoption of uniform
information systems platforms in the fastener segment. We will continue to
identify opportunities to integrate our operations, which could result in
further consolidation of our facilities or in some cases closure of certain
facilities, elimination of redundant costs, reductions in our workforce and
elimination of certain products.
The valve segment, excluding our refinery demolition operations, is closely tied
to the price of oil and gas. Sales and operating income within the valve group
have been adversely effected over the past twelve months. This reduction in
sales volume and profitability has been primarily attributable to reductions in
the worldwide and gulf coast rig counts, continued caution regarding the
long-term hydrocarbon price environment, consolidation within the oil and gas
industry and ongoing cost reduction efforts by oil and gas companies. Within the
valve segment, we believe that sales reached their lowest levels during the
second quarter and early part of the third quarter of 1999. Increasing worldwide
demand for oil and gas coupled with declining production in many areas should
support a more stable and favorable level of oil and gas prices in the future,
resulting in increased exploration and production spending in 2000 and an
improved demand for oilfield services.
Within the fastener segment, the stud bolt and gasket group serves both the oil
and gas exploration and production industry and the hydrocarbon processing
industry. The stud bolt and gasket operations have experienced results similar
to the valve segment operations. Our expectation is that with increasing oil and
gas prices, sales and profitability within these operation will improve.
Within the fastener segment, the rivet groups' operating profits have been
adversely effected by over capacity and resulting inefficient operations. As a
result, we have closed two manufacturing facilities and are consolidating the
operations into the three remaining facilities. Because December is historically
one of the lowest revenue months of the year for these companies and because we
expect some operational disruption as a result of the plant consolidation to be
felt in the fourth quarter, we expect the full impact of the various overhead
and cost reductions to occur in 2000.
The heavy fabrication segment (primarily Beaird) sales and profitability have
decreased significantly in the third quarter compared to historical periods.
This segments' customers have seen a reduction in their margins because of the
volatility of oil feedstock prices during 1999, and have significantly reduced
their capital spending. In addition,
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it has experienced significant competitive pressures from overseas. Because of
these factors, we expect that revenues will continue to decline in the fourth
quarter of 1999 and the first quarter of 2000. However, in response to this
anticipated revenue decline, we will continue to reduce overhead and make other
operational improvements to increase the efficiency of our operations as well as
seek new markets for our products.
NET CASH USED IN OPERATING ACTIVITIES. For the nine months ended September 30,
1999, net cash used in operating activities was $0.1 million compared to 1998,
which used cash of $7.7 million. The cash used in 1999 and 1998 was primarily as
a result of increases in current assets and liabilities exceeding net income and
depreciation and amortization. The most significant changes in working capital
for the nine months ended September 30, 1999 resulted from increases in costs
and estimated earnings in excess of billings related to the timing of billings
in relation to activity on long-term contracts. For the nine months ended
September 30, 1998, changes in working capital consisted primarily of an
increase in accounts receivable and an increase in notes receivable resulting
from the transfer of inventory to an affiliate in exchange for a note receivable
in the first quarter of 1998.
NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures, investments in unconsolidated affiliates, and acquisitions. For
the nine months ended September 30, 1999 and 1998, we made capital expenditures
of approximately $8.0 million and $7.0 million, respectively. Other significant
investing activities included investments in unconsolidated affiliates of $2.5
million and $0.5 million in 1999 and 1998, respectively. Other investing
activities in 1998 included acquisitions, net of cash acquired, of $3.1 million,
distributions from unconsolidated affiliates of $2.4 million and the sale of an
interest in a demolition contract for $2.0 million. For the nine months ending
September 30, 1999 we have made capital expenditures of $8.0 million and
anticipate spending $1.0 million for the remainder of 1999.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Our principal sources of cash other
than from operations are from financing activities, including borrowings under
our credit facilities and issuances of equity securities. Financing activities
provided net cash of $6.9 million in the nine months ended September 30, 1999
compared to $12.0 million in the comparable period in 1998. During the nine
months ended September 30, 1999, we issued common stock providing net proceeds
of $2.7 million compared to net proceeds of $12.8 million in the nine months
ended September 30, 1998. During 1998, we completed an offer to the holders of
our Class B warrants to exchange each Class B warrant and $10.00 cash for one
share of common stock, one Class C warrant and one Class D warrant, from which
we received net proceeds of $10.9 million after deducting approximately $100,000
of related expenses. During the nine months ended September 30, 1999, we had net
borrowings under the lines of credit of $3.7 million and borrowed $6.2 million
in long-term debt compared to borrowings under the line of credit of $4.5
million and in long-term debt of $3.1 million in the comparable period in 1998.
Repayments of principal on long-term debt were $5.7 million and $8.4 million for
the nine months ended September 30, 1999 and 1998, respectively.
PRINCIPAL DEBT INSTRUMENTS. As of September 30, 1999, we had an aggregate of
$100.3 million borrowed under our principal bank credit facility and debt
instruments entered into or assumed in connection with acquisitions as well as
other bank financings. Of these borrowed amounts,$27.3 million is scheduled to
mature during the next twelve months; however, a total of $47.6 million is
classified as current in the accompanying consolidated balance sheet due to the
ability of our lenders to accelerate payment of the debt as a result of our lack
of compliance with certain debt covenants.
Our existing credit facility is a revolving line of credit with Comerica
Bank-Texas. The principal amount is the lesser of $55 million or a defined
borrowing base. Advances under the revolving line of credit bear interest, at
our option, at either (i) the prime rate in effect at the time of the advance
(which was 8.25% at September 30, 1999) or (ii) an adjusted Eurodollar rate plus
an amount ranging from 2% to 2.75% based upon our ratios of senior debt to
EBITDA. The borrowing base is defined as 80% of eligible accounts receivable and
50% of eligible inventory subject to certain limitations. At September 30, 1999,
the borrowing capacity under the credit facility was $47.8 million and
availability was $1.5 million. The revolving line of credit matures on June 16,
2001.
At September 30, 1999 ,the Company has notes payable to a financial institution
of $10.1 million maturing December 2003 and October 2004 with interest at Libor
plus 2.5%, secured by certain assets and equipment of the Company.
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In June 1998, we entered into a loan from a financial institution in the
principal amount of $15 million that matures in November 1999. This loan bears
interest at Libor plus 10.0%. In connection with the acquisitions of businesses,
we also have entered into various term loans secured by machinery, equipment and
real estate of the businesses acquired and issued a convertible debenture in
connection with the acquisition of Beaird.
Certain of our debt arrangements contain requirements as to the maintenance of
minimum levels of working capital and net worth, minimum ratios of debt to cash
flow, cash flow to certain fixed charges, liabilities to tangible net worth,
current ratio, and capital expenditures. At September 30, 1999, we were not in
compliance with several of these covenants. Because of the losses incurred, the
Company did not achieve the required levels of working capital and net worth,
ratios of debt to cash flow, cash flow to certain fixed charges, liabilities to
tangible net worth and current ratio. Additionally, we do not anticipate being
in compliance with these covenants at December 31, 1999 absent modification from
the specific lenders. For the period ended September 30, 1999, we have not
received waivers for these covenant violations, and as a result, we have
classified these long-term obligations as current in the accompanying
consolidated balance sheet. Although the lenders have not expressed an intent to
do so, they have the ability to accelerate repayment of these obligations. The
lenders have expressed a willingness under certain conditions to refinance our
indebtedness including extending the maturity of the $15 million note and
amending the existing covenants; however, no assurance can be given that we will
be able to conclude any such arrangement.
BELLELI ENERGY. In 1998, we entered into an option agreement that grants us the
right to purchase approximately 96% of Belleli Energy S.r.l. ("Belleli) through
2002. Belleli is an Italian company that manufactures thick walled pressure
vessels and heat exchangers, as well as designs, engineers, constructs and
erects components for desalination, electric power and petrochemical plants. The
option agreement calls for payments totaling approximately $600,000 in 1999,
$700,000 in 2000, $800,000 in 2001 and $400,000 in 2002. During the second
quarter of 1999, the option agreement was amended to include an additional
option payment of $3 million, of which $2.6 million was funded by a private
placement of our common stock and the remainder from the conversion of a
$400,000 note receivable from Belleli.
In connection with the Belleli option agreement, we have agreed to support the
financing of Belleli to the extent its existing lines of credit and bonding
arrangements are not sufficient to support successful implementation of an
agreed upon business plan. We currently estimate that we will need to provide or
assist in arranging support to Belleli of up to $20 million, which may take the
form of cash, equity, bonding or other support; however, the actual amount is
subject to numerous variables outside of our control, including Belleli's
success in obtaining new contracts, its cash flow from operations and its
customers' and suppliers bonding requirements. At September 30, 1999, we had
provided to customers third-party performance guarantees of $3.8 million. We are
exposed to credit loss in the event of nonperformance by Belleli under these
arrangements; however, we do not anticipate nonperformance by Belleli. To date
we have been able to provide this financial support through bonding arrangements
with our bank and performance guarantees; however, even if we are successful in
refinancing certain of our debt facilities, there can be no assurance that such
sources will continue to be available to the extent necessary to provide
adequate support to Belleli, which would require us to pursue additional sources
of financing on terms that may be less desirable or advantageous than our
current arrangements or force us to sell to a third party all or part of our
rights to purchase Belleli.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact included in this report are forward looking statements. Such
forward looking statements include, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding our estimates of future trends in sales, expenses or
earnings and regarding our estimate of sufficiency of existing capital resources
and ability to raise additional capital to fund cash requirements for future
operations. Although we believe that the expectations reflected in such forward
looking statements are reasonable, there can be no assurance that the
expectations reflected in such forward looking statements will prove to be
correct. The ability to achieve these expectations is contingent upon a number
of factors which include demand for products, need for additional capital for
newly acquired companies and the ability to complete new acquisitions.
18
<PAGE>
YEAR 2000 COMPLIANCE
We are 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, we undertook a corporate-wide initiative designed to assess the
impact of the Year 2000 Issue on software and hardware utilized in our
operations, including information technology infrastructure ("IT") and embedded
manufacturing control technology ("Non-IT") and the impact, if any, that the
Year 2000 Issue, as it relates to customers and suppliers could have on our
business.
Many of our IT systems include hardware and packaged software recently purchased
from large vendors who have represented that these systems are already year 2000
compliant. However, we determined that it was necessary to modify portions of
our financial and accounting software. The implementation of these remediation
efforts is substantially complete. We have established a contingency plan to
address unavoidable risks. We do not currently rely on the IT systems of other
companies; however, failure of our suppliers or customers to become year 2000
compliant might have a material adverse impact on our operations.
Efforts with respect to the Year 2000 Issue have been handled internally by our
management and our other employees. Costs of developing and carrying out this
initiative are being funded from operations and have not represented a material
expense. We are substantially complete with our remediation efforts and do not
believe that the remaining costs of the Year 2000 Issue will be significant and
will not have a material adverse impact on our business, financial condition,
results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate under our
revolving line of credit and long-term debt. Under the revolving line of credit,
the principal balance is due in June 2001. As of September 30, 1999 the
revolving lines of credit had a principal balance of $46.2 million and the
long-term debt had a balance of $12.3 million at a floating interest rate equal
to the lenders' prime rate, 8.25% at September 30, 1999. We also have $25.1
million of long-term debt bearing interest at Libor plus 2.5% to 10%. The Libor
rate as of September 30, 1999 was 5.4%. A 1.0% increase in interest rates could
result in a $0.9 million annual increase in interest expense on the existing
principal balance. We have determined that it is not necessary to participate in
interest rate-related derivative financial instruments because we currently do
not expect significant short-term increases in interest rates charged under the
revolving line of credit or the long-term debt.
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
-------- -------------------------
27 Financial Data Schedules
(b) Reports on Form 8-K
On August 17, 1999, the Company filed a Current Report on Form
8-K restating its consolidated financial statements to reflect
the acquisition of Blastco Services Co. which was accounted for
as a pooling-of-interests.
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.
Date: November 15, 1999 By: /s/ Christine A. Smith
Christine A. Smith,
Chief Financial Officer and
Executive Vice President
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999
FOR INDUSTRIAL HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 264,819
<SECURITIES> 0
<RECEIVABLES> 40,429,453
<ALLOWANCES> 3,161,346
<INVENTORY> 40,122,301
<CURRENT-ASSETS> 95,155,835
<PP&E> 84,165,045
<DEPRECIATION> 18,595,077
<TOTAL-ASSETS> 202,441,705
<CURRENT-LIABILITIES> 126,414,973
<BONDS> 0
0
0
<COMMON> 151,110
<OTHER-SE> 64,422,816
<TOTAL-LIABILITY-AND-EQUITY> 202,441,705
<SALES> 196,065,030
<TOTAL-REVENUES> 196,065,030
<CGS> 160,187,333
<TOTAL-COSTS> 160,187,333
<OTHER-EXPENSES> 38,940,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,256,594
<INCOME-PRETAX> (6,345,556)
<INCOME-TAX> (2,347,856)
<INCOME-CONTINUING> (3,997,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,997,700)
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1999 FOR INDUSTRIAL HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,227
<SECURITIES> 0
<RECEIVABLES> 41,957,497
<ALLOWANCES> 0
<INVENTORY> 47,137,759
<CURRENT-ASSETS> 99,009,124
<PP&E> 72,989,970
<DEPRECIATION> 12,756,683
<TOTAL-ASSETS> 189,453,319
<CURRENT-LIABILITIES> 74,166,659
<BONDS> 0
0
0
<COMMON> 146,960
<OTHER-SE> 65,738,521
<TOTAL-LIABILITY-AND-EQUITY> 189,453,319
<SALES> 151,260,550
<TOTAL-REVENUES> 151,260,550
<CGS> 114,549,548
<TOTAL-COSTS> 114,549,548
<OTHER-EXPENSES> 27,602,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,340,769
<INCOME-PRETAX> 8,459,075
<INCOME-TAX> 3,208,753
<INCOME-CONTINUING> 5,250,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,250,322
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.36
</TABLE>
