UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-13600
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HUNTCO INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1643751
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14323 SOUTH OUTER FORTY, SUITE 600N, TOWN & COUNTRY, MISSOURI 63017
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(Address of principal executive offices)
(314) 878-0155
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
As of October 31, 2000, the number of shares outstanding of each class of the
Registrant's common stock was as follows: 5,292,000 shares of Class A common
stock and 3,650,000 shares of Class B common stock.
<PAGE>
HUNTCO INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999 (Audited)
Condensed Consolidated Statements of Operations
Nine and Three Months Ended September 30, 2000 and 1999
(Unaudited)
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE> PART I. FINANCIAL INFORMATION
-----------------------------------
Item 1. Financial Statements
-----------------------------------
HUNTCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,140 $ 414
Accounts receivable, net 33,408 41,835
Inventories 70,447 77,832
Other current assets 2,010 2,380
-------- --------
107,005 122,461
Property, plant and equipment, net 118,803 123,548
Other assets 10,998 10,725
-------- --------
$236,806 $256,734
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,618 $ 43,279
Accrued expenses 2,558 2,657
Current maturities of long-term debt 205 248
-------- --------
33,381 46,184
-------- --------
Long-term debt 104,187 105,470
Deferred income taxes - 1,166
-------- --------
104,187 106,636
-------- --------
Shareholders' equity:
Series A preferred stock (issued and
outstanding, 225; stated at liquidation value) 4,500 4,500
Common stock:
Class A (issued and outstanding, 5,292) 53 53
Class B (issued and outstanding, 3,650) 37 37
Additional paid-in-capital 86,530 86,530
Retained earnings 8,118 12,794
-------- --------
99,238 103,914
-------- --------
$236,806 $256,734
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30 Ended September 30
2000 1999 2000 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net sales $231,595 $265,439 $66,313 $84,199
Cost of sales 217,890 254,094 65,702 78,589
------- ------- ------ ------
Gross profit 13,705 11,345 611 5,610
Selling, general and
administrative expenses 13,063 14,786 4,098 4,578
------- ------- ------ ------
Income (loss) from operations 642 (3,441) (3,487) 1,032
Interest, net (7,566) (7,503) (2,492) (2,496)
------- ------- ------ ------
Loss before income taxes (6,924) (10,944) (5,979) (1,464)
Benefit for income taxes (2,400) (3,772) (2,049) (517)
------- ------- ------ ------
Net loss before extraordinary item (4,524) (7,172) (3,930) (947)
Extraordinary item, net of tax - (2,644) - -
------- ------- ------ ------
Net loss (4,524) (9,816) (3,930) (947)
Preferred dividends 150 150 50 50
------- ------- ------ ------
Net loss for common shareholders $ (4,674) $ (9,966) $(3,980) $ (997)
======= ======= ====== ======
Loss per common share
(basic and diluted):
Net loss before extraordinary item $ (.52) $ (.81) $ (.45) $ (.11)
Extraordinary item, net of tax - (.30) - -
----- ----- ----- -----
Net loss $ (.52) $(1.11) $ (.45) $ (.11)
===== ===== ===== =====
Weighted average
common shares outstanding:
(basic and diluted) 8,942 8,942 8,942 8,942
===== ===== ===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,524) $(9,816)
------- -------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 7,827 8,573
Deferred income taxes (2,397) (4,793)
Loss on early extinguishment of debt - 4,067
Decrease (increase) in:
accounts receivable 8,427 1,820
inventories 7,385 22,681
other current assets 370 431
other assets 212 242
Increase (decrease) in:
accounts payable (12,661) (22,336)
accrued expenses (99) (955)
Other (221) (34)
------- -------
Total adjustments 8,843 9,696
------- -------
Net cash provided (used) by operations 4,319 (120)
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,013) (717)
Proceeds from sale of property, plant and equipment 264 661
------- -------
Net cash (used) by investing activities (1,749) (56)
------- -------
Cash flows from financing activities:
Net proceeds from (payments on):
Revolving credit facilities (1,480) 46,918
Other debt obligations (214) (652)
Issuance of short-term debt - 9,791
Retirement of long-term notes - (50,000)
Debt repurchase premiums - (3,816)
Payments for debt issuance costs - (1,604)
Dividends (150) (463)
------- -------
Net cash provided (used) by financing activities (1,844) 174
------- -------
Net increase (decrease) in cash 726 (2)
Cash, beginning of period 414 21
------- -------
Cash, end of period $ 1,140 $ 19
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands, except per share amounts)
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1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of operations for the nine and three months
ended September 30, 2000 and 1999, and the condensed consolidated statement of
cash flows for the nine months ended September 30, 2000 and 1999 have been
prepared by Huntco Inc. and its subsidiaries (the "Company") without audit.
In the opinion of management, all adjustments (which include only normal,
recurring adjustments) necessary to present fairly the financial position at
September 30, 2000, and the results of operations and cash flows for the
interim periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted where inapplicable. A summary of
the significant accounting policies followed by the Company is set forth in
Note 1 to the Company's consolidated financial statements included within Item
8 to the Company's annual report on Form 10-K for the year ended December 31,
1999 (the "Form 10-K"), which Form 10-K was filed with the Securities and
Exchange Commission on March 30, 2000. The condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1999,
included in the aforementioned Form 10-K. The results of operations for the
periods ended September 30, 2000 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------- ---------
<S> <C> <C>
Raw materials $ 52,651 $ 57,013
Finished goods 17,796 20,819
-------- --------
$ 70,447 $ 77,832
======== ========
</TABLE>
The Company classifies its inventory of cold rolled steel coils as finished
goods, which coils can either be sold as master coils, without further
processing, or may be slit, blanked or cut-to-length by the Company prior to
final sale.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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This Quarterly Report on Form 10-Q contains certain statements that are
forward-looking and involve risks and uncertainties. Words such as "expects,"
"believes," and "anticipates," and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are based on current expectations and projections concerning the
Company's plans for the balance of 2000 and early 2001, and about the steel
processing industry in general, as well as assumptions made by Company
management and are not guarantees of future performance. Therefore, actual
events, outcomes, and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company encourages those
who make use of this forward-looking data to make reference to a complete
discussion of the factors which may cause the forward-looking data to differ
materially from actual results, which discussion is contained under the title
"Risk Factors - 2000 Outlook" included within Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, of the
Company's annual report on Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on March 30, 2000.
RESULTS OF OPERATIONS
Net sales for the third quarter of 2000 were $66.3 million, a decrease of
21.2% in comparison to net sales of $84.2 million for the three months ended
September 30, 1999. Net sales for the nine months ended September 30, 2000
were $231.6 million, a decrease of 12.8% in comparison to net sales of $265.4
million for the nine months ended September 30, 1999.
The decrease in net sales for the three and nine months ended September 30,
2000 was primarily attributable to the sale of the Company's former South
Carolina facility, which sale took place during the 1999 fourth quarter,
combined with somewhat lower year-over-year shipping volumes at the Company's
remaining operations, especially late in the 2000 second quarter and
throughout the 2000 third quarter. The former South Carolina facility
contributed $8.0 million and $22.9 million in net sales in the three and nine
months ended September 30, 1999.
The Company processed and shipped 235,533 and 747,731 tons of steel in the
three and nine months ended September 30, 2000, a decrease of 6.3% and 9.1%,
respectively, in relation to remaining operations for the comparable periods
of the prior year (i.e., exclusive of 1999 sales from the South Carolina
facility).
Average per ton selling values increased 9.0% and 11.0% during the three and
nine months ended September 30, 2000, in comparison to prior year levels.
These increases reflect generally higher 2000 versus 1999 prices for hot
rolled steel coils charged by the Company's suppliers and the resulting impact
upon eventual sales transaction prices, despite the current year downturn in
hot rolled steel prices that began in the second quarter of 2000 and has
continued into the fourth quarter, that are negatively impacting the Company
and others in the steel industry.
Approximately 31.7% and 26.3% of the tons processed in the three and nine
months ended September 30, 2000 represented customer-owned material processed
on a per ton, fee basis, versus tolling percentages of 24.8% and 24.0% in the
comparable periods of the prior year. Processing customer-owned material
generally results in lower revenues per ton, but higher gross profit expressed
as a percentage of net sales, in comparison to when the Company processes and
sells its own steel inventory.
The Company's relative increase in toll processing is attributable to efforts
to process greater amounts of customer-owned material into cold roll steel at
the Company's Blytheville, Arkansas facility. However, certain of the cold
rolled tolling business the Company undertook during 2000 is scheduled to
convert to a direct sales basis beginning in December 2000.
Gross profit expressed as a percentage of net sales was .9% and 5.9% for the
three and nine months ended September 30, 2000, which compares to 6.7% and
4.3% for the comparable periods of 1999, respectively. The lower gross profit
margin realized in the quarter ended September 30, 2000, versus that realized
year-to-date, is due to falling prices and weaker demand across all product
lines, which weakness began in the second quarter of 2000 and has continued
into the fourth quarter. Hot band prices have declined by over 30% since early
summer. The combination of interest rate hikes, higher energy costs, the
seasonal effect of summer manufacturing slowdowns, and higher import levels
encouraged by the decision of the International Trade Commission not to follow
the Commerce Department's preliminary finding to impose duties on the import
of cold rolled steel coils from twelve different countries, has influenced the
producing mills to lower their hot band prices to attract demand. However, the
lower hot band prices appear to have had little impact in encouraging steel
purchases. Rather, the prospect of lower prices in the market and the
apparent sufficient quantity of steel inventory in the distribution channels
have prompted distributors, processors (such as the Company), and the
Company's customers to reduce inventory positions in the face of such rapidly
falling prices. These operating margin pressures continued through the 2000
third quarter and into the fourth quarter.
The lower quarter-over-quarter gross profit percentage is further attributable
to the above-mentioned decline in industry-wide steel pricing, versus
stabilization of market prices in the third quarter of 1999. The higher year-
over-year gross profit percentage reflects favorable steel pricing during the
first half of 2000 versus the devastating impact that steel selling price
declines had on the Company in early 1999, especially in cold rolled steel
product pricing and volumes.
Selling, general and administrative ("SG&A") expenses of $4.1 million for the
quarter ended September 30, 2000 decreased $.5 million from 1999 levels, while
nine month year-to-date SG&A expenses decreased $1.7 million to $13.1 million
when comparing 1999 to 2000. These decreases are primarily attributable to
the elimination of SG&A costs incurred to operate the Company's former South
Carolina facility. SG&A expenses as a percentage of net sales increased from
5.4% to 6.2% when comparing the three months ended September 30, 1999 and
2000, while the percentage remained constant at 5.6% for the nine months ended
September 30, 1999 and 2000. The quarter-over-quarter increase is due to the
issues discussed above, and the fact that a good portion of these expenses are
fixed and do not decline with a drop in selling prices or volumes.
The Company incurred a loss from operations of $3.5 million for the third
quarter of 2000, a decrease of $4.5 million from prior year third quarter
results. This change is the result of the factors discussed in the preceding
paragraphs. The Company reported income from operations of $.6 million during
the nine months ended September 30, 2000, which compares to a loss from
operations of $3.4 million for the corresponding period of the prior year.
This improvement reflects the factors discussed in the preceding paragraphs.
Net interest expense of $2.5 million and $7.6 million was incurred during the
three and nine months ended September 30, 2000, versus $2.5 million and $7.5
million for the comparable periods of the prior year. Higher 2000 versus 1999
interest rates have been offset by lower average corporate borrowings during
2000 versus 1999. The Company has not capitalized any interest costs during
1999 or 2000.
The effective income tax rates experienced by the Company before extraordinary
charges were 34.3% and 34.7% during the three and nine months ended September
30, 2000, versus rates of 35.3% and 34.5% effective income tax rates
recognized during the comparable periods of the prior year.
The Company reported a net loss for common shareholders for the 2000 third
quarter of $4.0 million ($.45 per share both basic and diluted), which
compares to a net loss for common shareholders of $1.0 million ($.11 per share
both basic and diluted) in the prior year's third quarter. The Company
reported a net loss for common shareholders for the nine months ended
September 30, 2000 of $4.7 million ($.52 per share both basic and diluted),
which compares to a net loss for common shareholders of $10.0 million ($1.11
per share both basic and diluted), which included a net of tax extraordinary
charge of $2.6 million ($.30 per share both basic and diluted) incurred in
connection with the early retirement of the Company's previously outstanding
long term debt agreements on April 15, 1999. The net loss before
extraordinary charges for common shareholders was $7.3 million for the nine
months ended September 30, 1999 ($.81 per share both basic and diluted).
These changes reflect the factors discussed in the preceding paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
Notwithstanding the negative impact on the Company's operating results from
the dramatic decrease in steel prices which occurred in the 2000 third quarter
and the related slowdown in business activity levels, the Company was able to
reduce the level of its long-term debt obligations by $6.5 million during the
third quarter and to reduce the level of its trade obligations by $9.1 million
from balances at June 30, 2000. This was primarily accomplished through
improved working capital management. Net cash provided by operations during
the third quarter totaled $7.1 million. The Company expects to realize further
reductions in its investment in inventories of approximately $20.0 million
during the fourth quarter, helping to produce positive cash flow from
operations.
The Company's operating activities generated $4.3 million of cash during the
nine months ended September 30, 2000, while the Company used $.1 million of
cash during the comparable period of 1999. During the first nine months of
2000, operating results before non-cash charges for depreciation and
amortization, as well as inventory and accounts receivable reductions helped
to generate operating cash flow, which amounts were offset somewhat by a
reduction in accounts payable. Slower business activity was experienced by the
Company near the end of the second quarter and during the duration of the
third quarter of 2000. The Company reacted to this slower business activity
by adjusting its purchasing pattern for the balance of 2000 towards increasing
inventory turns with the goal of reducing overall inventory levels by
approximately 20% by the end of the year. The Company's investment in
accounts receivable decreased by $8.4 million for the first nine months of
2000, versus a decrease of $1.8 million for the nine months ended June 30,
1999. The current year decrease is primarily due to a reduction in shipping
volumes late in the second quarter and into the third quarter of 2000.
The Company used relatively limited amounts of funds for capital expenditures
during the nine months ended September 30, 2000 and 1999, investing $2.0
million and $.7 million, respectively.
The Company used $1.8 million of its operating cash flow to fund financing
activities during the nine months ended September 30, 2000, primarily for the
reduction of borrowings on its revolving credit facility. For the comparable
period of 1999, the Company generated $.2 million from financing activities,
which activities included the refinancing of the Company's long-term debt
arrangements. The Company incurred a $3.8 million prepayment penalty on April
15, 1999 to retire its former long-term debt obligations, as well as $1.6
million in costs to enter into its new asset-based revolving credit facility.
Total borrowings under the Company's asset-based revolving credit facility
were approximately $103.7 million at September 30, 2000. The maximum amount
of borrowings available to the Company under the revolver is based upon
percentages of eligible accounts receivable and inventory, as well as amounts
attributable to selected fixed assets of the Company. Close attention is
given to managing the liquidity afforded under the Company's asset-based
revolving credit agreement. The Company has operated during 2000 with only a
limited amount of unused borrowing capacity under the revolving credit
facility.
The Company has also accessed capital by way of off balance sheet financing
arrangements. The Company has entered into various operating leases for steel
processing and other equipment at certain of its facilities.
Subsequent to the first quarter 1999 common dividend of $.3 million, the
Company suspended the payment of common dividends. Future common dividends
may or may not be declared, at the discretion of the Board of Directors,
depending on restrictions imposed by the Company's revolving credit agreement,
industry conditions, evaluation of the Company's performance and current
liquidity situation.
The Company's operations, including its effort to reduce the amount of working
capital necessary to support its ongoing sales activities, unused borrowing
capacity, and access to additional operating lease financings are expected to
generate sufficient funds to meet the Company's working capital commitments,
debt service requirements, and necessary capital expenditures over the next
twelve months. The Company also announced on October 23, 2000, that it has
retained Chase Securities, Inc. to act as its financial advisor in responding
to inquiries concerning a potential sale or partnership relating to its cold
rolling operations, which transaction could also generate further liquidity
for the Company's remaining operations. At present, the Company would expect
that a decision concerning its cold rolling operations would be made sometime
before the end of the first quarter of 2001.
The Company maintains the flexibility to issue additional equity in the form
of Class A common stock or additional series of preferred stock junior to the
Series A preferred stock if and when market circumstances dictate. The
Company, from time-to-time, also explores financing alternatives in the form
of additional debt issuances, entering into further operating lease
financings, and pursuing strategic alternatives such as the possibility of the
sale or joint venture of its cold rolling operations as discussed in the
preceding paragraph. The Company also continues to evaluate its business with
the intent to streamline operations, improve productivity and reduce costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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INTEREST RATE RISK
In the ordinary course of business, the Company is exposed to interest rate
risks by way of changes in short-term interest rates. The Company has
currently elected not to hedge the market risk associated with its floating
rate debt. As of September 30, 2000, approximately $103.7 million of the
Company's debt obligations bear interest at variable rates. Accordingly, the
Company's earnings and cash flow are affected by changes in interest rates.
Assuming the current level of borrowings at variable rates and assuming a one-
half point increase in average interest rates under these borrowings, it is
estimated that the Company's quarterly interest expense would increase by over
$.1 million. In the event of an adverse change in interest rates, management
would likely take actions to mitigate the Company's exposure to interest rate
risk; however, due to the uncertainty of the actions that would be taken and
their possible effects, this analysis assumes no such action. Further, this
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
OTHER RISKS
The Company does not have any significant amount of export sales denominated
in foreign currencies, and acquires its raw material supply needs in U.S.
dollar denominated transactions. Therefore, the Company is not viewed as
being exposed to foreign currency fluctuation market risks. In addition,
although the Company both acquires and sells carbon steel coils and products,
no commodity exchange exists that the Company might access to hedge its risk
to carbon steel price fluctuations.
The Company has no material derivative financial instruments as of September
30, 2000, and does not enter into derivative financial instruments for trading
purposes.
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------------------
(a) See the Exhibit Index included herein.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on August 8, 2000, which filing discussed under
Item 5, Other Events, the Company's Class A common stock trading activity and
provided certain forward-looking data for the fiscal year ending December 31,
2000.
******************
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTCO INC.
(Registrant)
Date: November 14, 2000 By: /s/ ANTHONY J. VERKRUYSE
------------------------
Anthony J. Verkruyse,
Vice President &
Chief Financial Officer
(on behalf of the
Registrant and as principal
financial officer)
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
2: Omitted - not applicable.
3: Omitted - not applicable.
4: Omitted - not applicable.
10: Omitted - not applicable.
11: Omitted - not applicable.
15: Omitted - not applicable.
18: Omitted - not applicable.
19: Omitted - not applicable.
22: Omitted - not applicable.
23: Omitted - not applicable.
24: Omitted - not applicable.
27: Financial Data Schedule.
99: Omitted - not applicable.
