UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
Commission File Number 333-132918
FLAG INTERMEDIATE HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20-3779375 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
Commission File Number 001-13123
METALS USA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 76-0533626 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
2400 E. Commercial Blvd., Suite 905 Fort Lauderdale, Florida |
33308 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (954) 202-4000
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. Yes ¨ No ¨
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of common stock outstanding at November 14, 2011 of Flag Intermediate Holdings Corporation.: 100
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including Managements Discussion and Analysis of Financial Condition and Results of Operations. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, believe, estimate, expect, forecast, may, should, plan, project and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:
| projected operating or financial results, including anticipated cash flows from operations and asset sale proceeds; |
| expectations regarding capital expenditures, interest expense and other payments; |
| our beliefs and assumptions relating to our liquidity position, including our ability to adapt to changing market conditions; and |
| our ability to compete effectively for market share with industry participants. |
Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, among others:
| supply, demand, prices and other market conditions for steel and other commodities; |
| the timing and extent of changes in commodity prices; |
| the effects of competition on our business lines; |
| the condition of the steel and metal markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions; |
| the ability of our counterparties to satisfy their financial commitments; |
| tariffs and other government regulations relating to our products and services; |
| adverse developments in our relationship with both our key employees and unionized employees; |
| operational factors affecting the ongoing commercial operations of our facilities, including catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs, unanticipated changes in fuel costs or availability of fuel emission credits or workforce issues; |
| our ability to operate our businesses efficiently, manage capital expenditures and costs (including general and administrative expenses) and generate earnings and cash flow; |
| restrictive covenants in our indebtedness that may adversely affect our operational flexibility; |
| general political conditions and developments in the United States and in foreign countries whose affairs affect supply, demand and markets for steel, other metals and metal products; |
| our ability to retain key employees; and |
| our expectations with respect to our acquisition activity. |
In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this report, including Managements Discussion and Analysis of Financial Condition and Results of Operations. Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as otherwise required by applicable law.
2
FLAG INTERMEDIATE HOLDINGS CORPORATION AND
SUBSIDIARIES
PART IFINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements |
|||||
Unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 |
4 | |||||
5 | ||||||
6 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements |
7 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
30 | ||||
Item 3. |
49 | |||||
Item 4. |
49 | |||||
PART IIOTHER INFORMATION | ||||||
Item 1. |
51 | |||||
Item 1A. |
51 | |||||
Item 2. |
51 | |||||
Item 3. |
51 | |||||
Item 4. |
51 | |||||
Item 5. |
51 | |||||
Item 6. |
52 | |||||
53 | ||||||
Exhibit Index |
3
FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
September 30, 2011 |
December 31, 2010 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 8.3 | $ | 15.2 | ||||
Accounts receivable, net of allowance of $6.7 and $5.9, respectively |
235.2 | 149.3 | ||||||
Inventories |
383.7 | 290.8 | ||||||
Deferred income tax asset |
9.2 | 12.0 | ||||||
Prepayments and other |
4.5 | 9.8 | ||||||
|
|
|
|
|||||
Total current assets |
640.9 | 477.1 | ||||||
Property and equipment, net |
241.4 | 198.8 | ||||||
Intangible assets, net |
27.2 | 7.4 | ||||||
Goodwill |
53.6 | 47.3 | ||||||
Other assets |
14.4 | 13.5 | ||||||
|
|
|
|
|||||
Total assets |
$ | 977.5 | $ | 744.1 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 94.8 | $ | 66.6 | ||||
Accrued liabilities |
39.8 | 31.6 | ||||||
Payable to parent |
10.2 | 9.6 | ||||||
Current portion of long-term debt |
1.0 | 1.1 | ||||||
|
|
|
|
|||||
Total current liabilities |
145.8 | 108.9 | ||||||
Long-term debt, less current portion |
483.6 | 345.4 | ||||||
Deferred income tax liability |
71.6 | 62.5 | ||||||
Due to parent |
47.0 | 47.0 | ||||||
Other long-term liabilities |
22.5 | 22.2 | ||||||
|
|
|
|
|||||
Total liabilities |
770.5 | 586.0 | ||||||
|
|
|
|
|||||
Commitments and contingencies Stockholders equity: |
||||||||
Common stock, $0.01 par value, 100 shares authorized, issued and outstanding at September 30, 2011 and December 31, 2010 |
| | ||||||
Additional paid-in capital |
128.2 | 127.0 | ||||||
Retained earnings |
78.6 | 30.7 | ||||||
Accumulated other comprehensive income |
0.2 | 0.4 | ||||||
|
|
|
|
|||||
Total stockholders equity |
207.0 | 158.1 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 977.5 | $ | 744.1 | ||||
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
Three Months Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 492.3 | $ | 345.3 | $ | 1,430.2 | $ | 968.2 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
379.8 | 268.9 | 1,092.4 | 744.5 | ||||||||||||
Operating and delivery |
44.0 | 33.5 | 131.0 | 97.7 | ||||||||||||
Selling, general and administrative |
28.3 | 19.6 | 82.9 | 60.4 | ||||||||||||
Depreciation and amortization |
5.0 | 4.4 | 15.4 | 13.4 | ||||||||||||
Gain on sale of property and equipment |
(0.1 | ) | | | (0.1 | ) | ||||||||||
Advisory agreement termination charge |
| | | 3.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
35.3 | 18.9 | 108.5 | 49.0 | ||||||||||||
Other expense: |
||||||||||||||||
Interest expense |
10.4 | 9.5 | 32.1 | 27.4 | ||||||||||||
Other expense, net |
0.1 | | 0.1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
24.8 | 9.4 | 76.3 | 21.6 | ||||||||||||
Provision for income taxes |
8.8 | 4.4 | 28.4 | 9.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 16.0 | $ | 5.0 | $ | 47.9 | $ | 11.7 | ||||||||
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES
UNADUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine Months
Ended September 30, |
||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 47.9 | $ | 11.7 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Gain on sale of property and equipment |
| (0.1 | ) | |||||
Provision for bad debts |
2.2 | 1.3 | ||||||
Depreciation and amortization |
16.9 | 14.9 | ||||||
Amortization of debt issuance costs |
2.1 | 2.6 | ||||||
Deferred income taxes |
11.9 | 1.5 | ||||||
Excess tax benefit from stock-based compensation |
| (0.1 | ) | |||||
Stock-based compensation |
1.2 | 0.7 | ||||||
Advisory agreement termination charge |
| 3.3 | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||
Accounts receivable |
(70.9 | ) | (39.5 | ) | ||||
Inventories |
(74.8 | ) | (43.2 | ) | ||||
Prepayments and other |
5.4 | 2.2 | ||||||
Accounts payable and accrued liabilities |
13.6 | 22.2 | ||||||
Other |
2.2 | 1.6 | ||||||
|
|
|
|
|||||
Net cash used in operating activities |
(42.3 | ) | (20.9 | ) | ||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Sales of assets |
0.2 | 0.2 | ||||||
Purchases of assets |
(10.1 | ) | (2.2 | ) | ||||
Acquisition costs, net of cash acquired |
(88.1 | ) | (19.0 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(98.0 | ) | (21.0 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Borrowings on credit facility |
180.1 | 60.0 | ||||||
Repayments on credit facility |
(42.7 | ) | (59.5 | ) | ||||
Repayments of long-term debt |
(1.1 | ) | (0.1 | ) | ||||
Deferred financing costs |
(2.9 | ) | | |||||
Excess tax benefit from stock-based compensation |
| 0.1 | ||||||
Advances from parent |
| 47.0 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
133.4 | 47.5 | ||||||
|
|
|
|
|||||
Net decrease in cash |
(6.9 | ) | 5.6 | |||||
Cash, beginning of period |
15.2 | 5.5 | ||||||
|
|
|
|
|||||
Cash, end of period |
$ | 8.3 | $ | 11.1 | ||||
|
|
|
|
|||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 25.1 | $ | 19.8 | ||||
|
|
|
|
|||||
Cash paid for income taxes |
$ | 15.8 | $ | 1.0 | ||||
|
|
|
|
|||||
Cash received for income taxes |
$ | (0.4 | ) | $ | (9.2 | ) | ||
|
|
|
|
|||||
Investments in property and equipment not paid |
$ | 0.1 | $ | 0.1 | ||||
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions)
1. Basis of Presentation and Summary of Significant Accounting Policies
Flag Intermediate Holdings Corporation (Flag Intermediate) and its wholly-owned subsidiary Metals USA, Inc. (Metals USA) and the wholly-owned subsidiaries of Metals USA are referred to collectively herein as the Company, we or our. Metals USA prior to its November 30, 2005 acquisition by Apollo Management V L.P. (Apollo Management and together with its affiliated investment entities Apollo or Apollo V) (the Merger) is referred to herein as the Predecessor Company. The condensed consolidated financial statements include the accounts of Flag Intermediate, and Metals USA and its subsidiaries. Intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. Flag Intermediate and Metals USA are wholly-owned subsidiaries of Metals USA Holdings Corp. (Metals USA Holdings).
The interim condensed consolidated financial statements included herein are unaudited; however, they include adjustments of a normal recurring nature which, in our opinion, are necessary to present fairly the interim condensed consolidated financial information as of and for the periods indicated. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
Fair Value of Financial Assets and LiabilitiesAccounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 classifies the inputs used to measure fair value into the following hierarchy:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Companys interest rate swap derivatives are valued using market data which is derived by combining certain inputs with quantitative models and processes to generate interest rate forward curves and discount factors (see Note 5).
Level 3Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.
7
Liabilities measured at fair value on a recurring basis are summarized below:
September
30, 2011 |
Fair Value Measurements
at Reporting Date Using |
|||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Interest rate swaps |
$ | 0.6 | $ | | $ | 0.6 | $ | | ||||||||
December 31, 2010 |
||||||||||||||||
Interest rate swaps |
$ | 2.3 | $ | | $ | 2.3 | $ | |
Our receivables, payables, prepayments and accrued liabilities are current assets and obligations and, accordingly, the recorded values are believed by management to approximate fair value. Our 11 1/8% Senior Secured Notes due 2015 (the Metals USA Notes) are thinly traded public debt instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The fair value of publicly traded debt is determined based on quoted market prices. The fair value of the Companys debt that is not traded and is fixed-rate is estimated by discounting the interest payments and principal amount at the Companys current borrowing rate (yield to maturity). For floating rate debt that is not traded, fair value is not sensitive to interest rates since coupons float with Treasury or London Interbank Offered Rate (LIBOR) yields, and book value is a reasonable approximation of fair value after considering the stability of the Companys default risk. The estimated fair value of current and long-term debt at September 30, 2011 and December 31, 2010 was $526.2 and $401.8, respectively.
New Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-29 Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29) which amended ASC Topic 805 Business Combinations to specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and the amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We have disclosed the required information in accordance with ASU 2010-29 as it relates to the Trident acquisition described in Note 2 below.
In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05) which will amend some of the guidance in ASC Topic 220 Comprehensive Income regarding how companies must present comprehensive income. The main provisions of ASU 2011-05 provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either a single statement or two separate statements. A single statement would contain the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for all comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for all comprehensive income. The ASU is intended to increase the prominence of other comprehensive income in financial statements and to facilitate convergence of U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-05 are to be applied retrospectively. For public entities, the ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The Company expects to include the expanded disclosures about
8
comprehensive income within its financial statements beginning in the first quarter of 2012. ASU 2011-05 impacts presentation only and will have no effect on the Companys financial condition, results of operations, or cash flows.
In September 2011, the FASB issued ASU No. 2011-08 IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08) which amends the guidance in ASC Topic 350 IntangiblesGoodwill and Other on testing goodwill for impairment. ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The ASUs objective is to simplify how an entity tests goodwill for impairment. ASU 2008-11 is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the provisions of ASU 2011-08 to have a material impact on its financial statements.
2. Acquisitions
The Richardson Trident Company
On March 11, 2011, we acquired all of the issued and outstanding stock of The Richardson Trident Company (Trident). Tridents results of operations have been included in the condensed consolidated statement of operations since the date of acquisition. Trident is a general line metal service center with fabricating capabilities designed to service the oil and gas industry, and is also a wholesale distributor of metals, plastics and electronic parts. Trident operates under The Richardson Trident Company and The Altair Company trade names. Tridents principal facility is in Richardson, Texas with branch locations in Houston, Austin, El Paso, Harlingen and Odessa, Texas; Tulsa, Oklahoma; Olathe, Kansas; Los Angeles, California; Boston, Massachusetts and Thomasville, Georgia. The Company paid $90.4 in cash for the stock of Trident, which included $54.2 for the repayment of Trident debt, and $1.8 in the form of a note payable, for a total purchase price of $92.2. The purchase was funded with borrowings under our $500.0 amended and restated senior secured asset-based credit facility due 2015 (the ABL facility).
The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $8.2, which was allocated to goodwill. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Metals USA and Trident. All of the goodwill was assigned to the Companys Flat Rolled and Non-Ferrous Segment (see Note 4). The Trident acquisition was a taxable business combination and as such, the entire amount of the goodwill recognized is expected to be deductible for income tax purposes.
9
The estimated amount of goodwill and related allocations of the fair values assigned to assets acquired and liabilities assumed are based on preliminary data and are subject to change based on the final valuation of tangible and intangible assets. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:
Cash |
$ | 2.3 | ||
Accounts receivable, trade |
17.2 | |||
Inventories |
18.1 | |||
Other current assets |
0.1 | |||
Property and equipment |
47.8 | |||
Customer list intangible asset |
19.0 | |||
Trade name intangible asset |
3.3 | |||
Goodwill |
8.2 | |||
|
|
|||
Total assets acquired |
116.0 | |||
|
|
|||
Accounts payable and accrued liabilities |
23.8 | |||
Note payable |
1.8 | |||
|
|
|||
Total liabilities assumed |
25.6 | |||
|
|
|||
Net assets acquired |
$ | 90.4 | ||
|
|
Results for the nine months ended September 30, 2011 include operating results from the Trident acquisition from the date of the acquisition closing. Trident contributed $42.6 and $90.9 of incremental sales and $3.1 and $6.1 of incremental operating income for the three and nine months ended September 30, 2011, respectively. Acquisition-related costs for the nine months ended September 30, 2011 amounted to approximately $1.5, and are included in selling, general and administrative expenses in the Companys condensed consolidated statement of operations. The customer list intangible asset will be amortized on an accelerated basis over twelve years based on its estimated useful life.
Trident provides a broad range of metals and processing services with a product mix that emphasizes aluminum, stainless steel and nickel. The majority of Tridents customer base operates in the oil and gas services sector. Trident also serves customers in the aerospace, defense and transportation industries. Processing services include precision sawing, boring, honing, slitting, sheeting, shearing and turning. Trident also offers supply chain solutions such as just-in-time delivery and value-added components required by original equipment manufacturers. As a result of the acquisition, we expect to increase our non-ferrous and value-added processing product and service offerings in the geographic areas and end markets that Trident currently serves.
The following unaudited pro forma information presents our consolidated results of operations as if the Trident acquisition had occurred on January 1, 2010, after the effect of certain adjustments, including increased depreciation expense resulting from recording fixed assets at fair value, interest expense on the acquisition debt, amortization of certain identifiable intangible assets, severance costs for certain Trident employees that were terminated as of the acquisition date, certain other non-recurring costs that we will not incur after taking control of Trident, and a provision for income taxes for Trident, which was previously treated as an S-Corporation.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 492.3 | $ | 384.2 | $ | 1,456.0 | $ | 1,078.9 | ||||||||
Net income |
$ | 16.0 | $ | 6.1 | $ | 48.2 | $ | 11.1 |
10
Ohio River Metal Services
On December 31, 2010, we acquired all of the issued and outstanding stock of Ohio River Metal Services (ORMS), located in Jeffersonville, Indiana. The results of operations of ORMS have been included in the condensed consolidated statement of operations since the date of acquisition. ORMS operates a flat rolled metal service center that provides metal products and processing services to customers throughout the Ohio River Valley area. The purchase price for ORMS was $17.9, including the assumption of $8.4 of long-term debt, and was funded with borrowings under the ABL facility. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $0.4, which was allocated to goodwill. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:
Cash. |
$ | 0.5 | ||
Accounts receivable, trade |
2.6 | |||
Inventories |
4.9 | |||
Other current assets |
0.1 | |||
Property and equipment |
18.3 | |||
Fulfillment contract intangible asset |
0.8 | |||
Goodwill |
0.4 | |||
|
|
|||
Total assets acquired |
27.6 | |||
|
|
|||
Accounts payable and accrued liabilities |
5.7 | |||
Long-term debt |
8.4 | |||
Interest rate swaps |
0.6 | |||
Deferred tax liabilities |
3.3 | |||
Other noncurrent liabilities |
0.1 | |||
|
|
|||
Total liabilities assumed |
18.1 | |||
|
|
|||
Net assets acquired |
$ | 9.5 | ||
|
|
The fulfillment contract intangible asset will be amortized on a straight-line basis over fifteen years based on its estimated useful life. The pro forma effects of the ORMS acquisition would not have been material to our results of operations for the three and nine months ended September 30, 2010 and, therefore, are not presented.
11
J. Rubin & Co.
On June 28, 2010, we acquired all of the issued and outstanding stock of J. Rubin & Co. (J. Rubin) for $19.0. J. Rubins results of operations have been included in the condensed consolidated statement of operations since the date of acquisition. J. Rubin is a metal service center business that operates in Illinois, Wisconsin and Minnesota with a broad product mix consisting of carbon steel bars, carbon plate and laser-cut flat-rolled products. J. Rubins product mix and processing services are provided to a diverse range of end markets. The purchase price was funded with existing cash, $17.8 of which was paid at closing and $1.2 of which was placed in escrow to secure the sellers indemnity obligations. The purchase price included $6.0 for the repayment of J. Rubin debt at closing. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $3.5, which was allocated to goodwill. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:
Accounts receivable, trade |
$ | 3.8 | ||
Inventories |
5.8 | |||
Other current assets |
0.2 | |||
Property and equipment |
9.7 | |||
Customer list intangible asset |
2.0 | |||
Goodwill |
3.5 | |||
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Total assets acquired |
25.0 | |||
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Accounts payable and accrued liabilities |
2.5 | |||
Deferred tax liabilities |
3.5 | |||
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Total liabilities assumed |
6.0 | |||
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Net assets acquired |
$ | 19.0 | ||
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The customer list intangible asset is being amortized on an accelerated basis over ten years based on its estimated useful life. The pro forma effects of the J. Rubin acquisition would not have been material to our results of operations for the three and nine months ended September 30, 2010 and, therefore, are not presented.
3. Inventories
Inventories consist of the following:
September 30, 2011 |
December 31, 2010 |
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Raw materials |
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Plates and Shapes |
$ | 151.5 | $ | 138.6 | ||||
Flat Rolled and Non-Ferrous |
177.1 | 108.3 | ||||||
Building Products |
5.6 | 5.4 | ||||||
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Total raw materials |
334.2 | 252.3 | ||||||
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Work-in-process and finished goods |
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Flat Rolled and Non-Ferrous |
37.6 | 29.3 | ||||||
Building Products |
11.9 | 9.2 | ||||||
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Total work-in-process and finished goods |
49.5 | 38.5 | ||||||
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Total inventories |
$ | 383.7 | $ | 290.8 | ||||
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4. Goodwill and Intangible Assets
The changes in the carrying amounts of goodwill by segment for the nine months ended September 30, 2011 are as follows:
As of December 31, 2010 |
Acquisitions/ Purchase Accounting Adjustments |
Realization of Tax Benefits |
As of September 30, 2011 |
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Plates and Shapes |
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Gross Goodwill and |
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Carrying Amount of Goodwill |
$ | 14.9 | $ | | $ | (0.3 | ) | $ | 14.6 | |||||||
Flat Rolled and Non-Ferrous |
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Gross Goodwill and |
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Carrying Amount of Goodwill |
24.4 | 8.2 | | 32.6 | ||||||||||||
Building Products |
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Gross Goodwill and |
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Carrying Amount of Goodwill |
2.2 | | | 2.2 | ||||||||||||
Corporate |
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Gross Goodwill |
10.0 | | (1.6 | ) | 8.4 | |||||||||||
Impairments |
(4.2 | ) | | | (4.2 | ) | ||||||||||
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Carrying Amount of Goodwill |
5.8 | | (1.6 | ) | 4.2 | |||||||||||
Consolidated Total |
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Gross Goodwill |
51.5 | 8.2 | (1.9 | ) | 57.8 | |||||||||||
Impairments |
(4.2 | ) | | | (4.2 | ) | ||||||||||
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Carrying Amount of Goodwill |
$ | 47.3 | $ | 8.2 | $ | (1.9 | ) | $ | 53.6 | |||||||
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Additions to goodwill recorded at the Flat Rolled and Non-Ferrous segment for the nine months ended September 30, 2011 are attributable to the Trident acquisition, which closed on March 11, 2011, discussed in Note 2. Reductions to goodwill at the Corporate and Plates and Shapes segments for the nine months ended September 30, 2011 are due to the realization of tax benefits for tax-deductible goodwill recognized in connection with the Merger and the acquisition of Port City Metal Services (Port City) in May 2006, both of which were taxable business combinations.
The carrying amounts of the Companys intangible assets are as follows:
September 30, 2011 |
December 31, 2010 |
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Customer lists |
$ | 61.8 | $ | 42.8 | ||||
Less: Accumulated amortization |
(41.0 | ) | (38.8 | ) | ||||
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$ | 20.8 | $ | 4.0 | |||||
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Trade names |
$ | 6.6 | $ | 3.3 | ||||
Less: Accumulated amortization |
(1.0 | ) | (0.7 | ) | ||||
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$ | 5.6 | $ | 2.6 | |||||
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Fulfillment contract |
$ | 0.8 | $ | 0.8 | ||||
Less: Accumulated amortization |
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$ | 0.8 | $ | 0.8 | |||||
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During the nine months ended September 30, 2011, we acquired $19.0 of customer list intangible assets and $3.3 of trade name intangible assets as a result of the Trident acquisition discussed in Note 2.
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Aggregate amortization expense for the three months ended September 30, 2011 and 2010 was $0.6 and $0.9, respectively. Aggregate amortization expense for the nine months ended September 30, 2011 and 2010 was $2.4 and $3.0, respectively.
Aggregate remaining amortization of our intangible assets is as follows:
For the Year Ending December 31, |
Estimated Amortization Expense |
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2011 (remaining 3 months) |
$ | 0.6 | ||
2012 |
$ | 3.6 | ||
2013 |
$ | 3.5 | ||
2014 |
$ | 3.3 | ||
2015 |
$ | 3.0 | ||
Thereafter |
$ | 13.2 |
5. Derivatives
In February 2008, $250.0 notional amount of outstanding borrowings under the ABL facility was swapped from a floating LIBOR-based rate to a fixed rate. The swaps entitled us to receive quarterly payments of interest at a floating rate indexed to three-month LIBOR and pay a fixed rate that ranged from 2.686% to 2.997%, converting a portion of the outstanding borrowings on our ABL facility from a floating rate obligation to a fixed rate obligation. Pretax realized gains and losses from the Companys ABL facility interest rate swaps which were recognized in earnings during the nine months ended September 30, 2011 amounted to $0.1 of additional interest expense, consisting of $1.8 of settlements, offset by $1.7 of changes in the fair value of derivatives. The Companys ABL facility interest rate swaps expired during the second quarter of 2011.
In November 2004 and December 2007, ORMS, which we acquired on December 31, 2010 (see Note 2), entered into two separate interest rate swap agreements in connection with the Jeffersonville, Indiana Industrial Revenue Bonds (IRBs) discussed in Note 8. The notional amounts under these swaps correspond to the principal amounts of the IRBs, which were a combined $7.1 as of September 30, 2011, and are reduced on an annual basis as the IRBs are redeemed. Under the swaps, the notional amounts under the Jeffersonville IRBs were swapped from a floating rate based on a rate established by the Securities Industry and Financial Market Association (SIFMA) to fixed rates of 4.00% and 3.75%, converting the outstanding borrowings on the Jeffersonville IRBs from floating rate obligations to fixed rate obligations. Pretax realized losses from the Companys Jeffersonville IRB interest rate swaps recognized in earnings during the nine months ended September 30, 2011 were $0.3, with approximately $0.2 of settlements and $0.1 of changes in the fair value of derivatives.
We account for gains and losses on our interest rate swap derivatives based on realized and unrealized amounts. Realized gains and losses are determined by actual derivative settlements during the period. Unrealized gains and losses are based on the periodic mark to market valuation of our derivative contracts in place. The primary objective for our use of interest rate swaps is to reduce our exposure to changes in interest rates and to manage variable interest rate exposure to achieve greater flexibility in meeting overall financial objectives.
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The following table presents the location within the condensed consolidated balance sheet of all assets and liabilities associated with the Companys outstanding derivatives at September 30, 2011 and December 31, 2010.
Asset Derivatives | Liability Derivatives | |||||||||||||||||
Derivatives not designated as hedging |
Balance Sheet Location |
Fair Value
at September 30, 2011 |
Fair Value
at December 31, 2010 |
Fair Value
at September 30, 2011 |
Fair Value
at December 31, 2010 |
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Interest rate swaps |
Accrued liabilities | $ | | $ | | $ | | $ | 1.9 | |||||||||
Other long-term liabilities |
| | 0.6 | 0.4 | ||||||||||||||
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Total derivatives not designated as hedging instruments under ASC 815 |
$ | | $ | | $ | 0.6 | $ | 2.3 | ||||||||||
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Total Derivatives |
$ | | $ | | $ | 0.6 | $ | 2.3 | ||||||||||
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The following tables present the pretax impact of the Companys derivative instruments within the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010. Pretax realized gains and losses from derivatives which are recognized in earnings are included in interest expense in the condensed consolidated statements of operations.
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||
Amount Recognized as Interest Expense from Derivatives | ||||||||||||||||
Three months ended September 30, |
Nine months ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest rate swaps |
$ | 0.2 | $ | 0.7 | $ | 0.3 | $ | 2.4 |
The Companys credit exposure related to interest rate swaps is represented by the fair value of swap agreements with a net positive fair value (asset position) to the Company at the reporting date. At such times, the outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparty to the agreements. However, we have not experienced any credit loss as a result of counterparty nonperformance in the past. Our credit risk exposure with respect to our interest rate swaps is limited to a single counterparty, which we monitor based on credit ratings. As of September 30, 2011, our interest rate swap derivatives had net negative fair values (liability positions).
6. Other Assets
Other assets consist of the following:
September 30, 2011 |
December 31, 2010 |
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Deferred financing costs |
$ | 10.2 | $ | 8.9 | ||||
Deferred debt offering costs |
3.0 | 3.6 | ||||||
Other |
1.2 | 1.0 | ||||||
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Total other assets |
$ | 14.4 | $ | 13.5 | ||||
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Aggregate amortization of debt issuance costs for the three and nine months ended September 30, 2011 was $0.7 and $2.1, respectively. Aggregate amortization of debt issuance costs for the three and nine months ended September 30, 2010 was $0.9 and $2.6, respectively.
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7. Accrued Liabilities
Accrued liabilities consist of the following:
September 30, 2011 |
December 31, 2010 |
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Salaries and employee benefits |
$ | 14.8 | $ | 10.8 | ||||
Income taxes |
2.6 | 3.1 | ||||||
Taxes, other than income |
4.2 | 2.8 | ||||||
Interest |
8.9 | 3.3 | ||||||
Insurance |
5.5 | 5.2 | ||||||
Audit and tax fees |
0.8 | 0.5 | ||||||
Warranty liability |
0.6 | 0.5 | ||||||
Lease terminations |
0.2 | 0.4 | ||||||
Merger considerationPredecessor Company common shares outstanding |
| 0.6 | ||||||
Current portion of interest rate swap liability |
| 1.9 | ||||||
Other |
2.2 | 2.5 | ||||||
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Total accrued liabilities |
$ | 39.8 | $ | 31.6 | ||||
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8. Debt
Debt consists of the following:
September 30, 2011 |
December 31, 2010 |
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Senior Secured Asset-Based Revolving Credit Facility (ABL facility) |
$ | 243.4 | $ | 106.0 | ||||
11 1/8% Senior Secured Notes due 2015 (Metals USA Notes) |
226.3 | 226.3 | ||||||
Industrial Revenue Bonds (IRBs) |
12.8 | 13.4 | ||||||
Due to Parent |
47.0 | 47.0 | ||||||
Obligations under capital leases and other |
2.1 | 0.8 | ||||||
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Total debt |
531.6 | 393.5 | ||||||
Lesscurrent portion of debt |
1.0 | 1.1 | ||||||
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Total long-term portion of debt |
$ | 530.6 | $ | 392.4 | ||||
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The weighted average interest rates under the ABL facility for the three and nine months ended September 30, 2011 were 2.62% and 2.93%, respectively. The weighted average interest rates under the ABL facility for the three and nine months ended September 30, 2010 were 2.19% and 2.09%, respectively.
Senior Secured Asset-Based Revolving Credit Facility
On December 17, 2010, Flag Intermediate, Metals USA, and certain subsidiaries of Metals USA entered into an amended and restated loan and security agreement (the ABL Credit Agreement) with the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. Flag Intermediate and Metals USA are wholly-owned subsidiaries of Metals USA Holdings Corp.
The ABL Credit Agreement provides for borrowings of up to $500.0 of Tranche A commitments and $35.0 of first-in last-out (FILO) Tranche A-1 commitments (which may be increased up to $750.0 at the option of Metals USA, including $35.0 under the FILO tranche)), 5-year, senior secured asset-based credit facility (the ABL facility) that amended and restated Metals USAs then-existing $625.0 senior secured asset-based credit facility that was scheduled to mature on November 30, 2011.
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On March 9, 2011, we activated $25.0 of the FILO tranche under the ABL facility. The ABL facility permits us to borrow on a revolving basis through the earlier of November 30, 2015 and 60 days prior to the scheduled maturity of the Metals USA Notes, unless the Metals USA Notes are refinanced to a date more than 5 years and 60 days after the closing date of the ABL facility and/or repaid prior to such date. Substantially all of our subsidiaries are borrowers under the ABL facility.
On August 10, 2011, we amended the ABL facility by reducing the borrowing costs on the Tranche A commitments by 75 basis points and reducing the borrowing costs on the FILO tranche by 62.5 basis points. Under the amendment, the maturity date of the ABL facility was extended to the earlier of August 10, 2016 and 60 days prior to the scheduled maturity of the Metals USA Notes, unless the Metals USA Notes are refinanced to a date more than 5 years and 60 days after the closing date of the ABL facility and/or repaid prior to such date. The ABL facility remains subject to the same acceleration provision with respect to the maturity of the Metals USA Notes described below.
Borrowing Base. The maximum availability under the ABL facility is based on eligible receivables and eligible inventory, subject to certain reserves. Our borrowing availability fluctuates daily with changes in eligible receivables and inventory, less outstanding borrowings and letters of credit. The borrowing base is equal to:
| 85% of the net amount of eligible accounts receivable, plus |
| the lesser of (x) 80% of the lesser of the original cost or market value of eligible inventory and (y) 90% of the net orderly liquidation value of eligible inventory, plus |
| an incremental amount of the lesser of (x) the maximum commitments under the FILO tranche and (y) the sum of (i) 5% of the net amount of eligible accounts receivable and (ii) 5% of the net orderly liquidation value of eligible inventory during the effectiveness of any FILO tranche, less |
| reserves. |
The ABL facility provides sub-limits for up to $25.0 of swingline loans and up to $100.0 for the issuance of letters of credit. Both the face amount of any outstanding letters of credit and any swingline loans will reduce borrowing availability under the ABL facility on a dollar-for-dollar basis.
As of September 30, 2011, we had $446.6 of eligible collateral, $243.4 in outstanding advances, $25.9 in open letters of credit and $177.3 of additional borrowing capacity.
Guarantees and Security. Substantially all of our subsidiaries are defined as borrowers under the ABL Credit Agreement. The obligations under the ABL facility are guaranteed by Flag Intermediate and certain of our domestic subsidiaries and are secured by a first-priority lien and security interest in, among other things, accounts receivable, inventory and deposit accounts of Flag Intermediate, Metals USA and the subsidiaries of Metals USA party to the ABL Credit Agreement and a second-priority lien and security interest in, among other things, substantially all other tangible and intangible personal and real property owned by such companies, subject to certain exceptions.
Interest Rate and Fees. At Metals USAs option, interest accrues on the loans made under the ABL facility at either LIBOR plus a specified margin (set at 1.75% (3.25% for the FILO tranche) as of September 30, 2011), or the base rate (which is based off of the federal funds rate plus 0.50%, Bank of Americas prime rate or LIBOR plus 1.00%), plus a specified margin (set at 0.75% (2.25% for the FILO tranche) as of September 30, 2011). Under the ABL facility amendment that was executed on August 10, 2011, the specified margins over LIBOR were reduced by 75 basis points for the Tranche A Commitments and 62.5 basis points for the FILO tranche. The marginal rates vary based on our average monthly excess availability (as defined in the ABL Credit Agreement). The applicable base rate and the effective LIBOR rate for the loans made under the ABL facility were 3.25% and 0.374%, respectively, as of September 30, 2011.
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A commitment fee is payable on any unused commitment equal to 0.25% per annum to the lenders under the ABL facility if utilization under the facility exceeds 40.0% of the total commitments under the facility and a commitment fee equal to 0.375% per annum if utilization under the facility is less than or equal to 40.0% of the total commitments under the facility. Customary letter of credit fees are also payable, as applicable.
Certain Conditions Precedent and Covenants. As a condition precedent to any borrowing or issuance of a letter of credit, a material adverse effect shall not have occurred or exist. The ABL facility contains customary representations, warranties and covenants, including limitations on our ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases, with respect to capital stock, repay debt, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales, and engage in certain transactions with affiliates. The ABL facility requires a lock-box arrangement for collection of accounts receivable and proceeds from sales of inventory. Metals USA may make withdrawals from the lock-box unless an event of default exists or borrowing availability is less than the greater of (i) $50.0 and (ii) 12.5% of the lesser of (A) the borrowing base (not to exceed $62.5) and (B) the aggregate commitment. We do not have to maintain a minimum fixed charge coverage ratio (FCCR) as long as our borrowing availability is greater than or equal to the greater of (i) $45.0 and (ii) 10% of the lesser of the borrowing base and the aggregate commitment (the Minimum Availability). We must maintain an FCCR of at least 1.0 to 1.0 if borrowing availability falls below the Minimum Availability. For purposes of determining covenant compliance, the FCCR is determined by dividing (i) the sum of Adjusted EBITDA (as defined in the ABL Credit Agreement) minus income taxes paid in cash (excluding certain specified deferred taxes) minus non-financed capital expenditures by (ii) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt, and is calculated based on such amounts for the most recent period of four consecutive fiscal quarters for which financial statements are available. FCCR and Adjusted EBITDA are each calculated on a pro forma basis. As of September 30, 2011, our FCCR was 2.78.
Certain Events of Default and Remedies. The ABL facility contains events of default with respect to: default in payment of principal when due, default in the payment of interest, fees or other amounts after a specified grace period, material breach of the representations or warranties, default in the performance of covenants, a default that causes or permits acceleration under any indebtedness with a principal amount in excess of a specified amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security agreements or guarantees, material judgments, or a change of control. In the event of default, the ABL Credit Agreement may permit a majority of the lenders to: (i) restrict the amount of or refuse to make revolving loans; (ii) cause customer receipts to be applied against borrowings under the ABL facility which would cause Metals USA to suffer a rapid loss of liquidity and restrict the ability to operate on a day-to-day basis; (iii) restrict or refuse to provide letters of credit; or ultimately; (iv) terminate the commitments and the agreement; or (v) declare any or all obligations to be immediately due and payable if such default is not cured in the specified period required. Any payment default or acceleration under the ABL facility would also result in a default under the Metals USA Notes that would provide the holders of the Metals USA Notes with the right to demand immediate repayment.
Costs related to the establishment of the ABL facility, in addition to subsequent amendments to the ABL facility, were capitalized and are being charged to interest expense over the life of the ABL facility. Unamortized financing costs of $10.2 and $8.9 were included in other non-current assets as of September 30, 2011 and December 31, 2010, respectively.
11 1/8% Senior Secured Notes Due 2015
On November 30, 2005, Flag Acquisition Corporation (Flag Acquisition) sold $275.0 aggregate principal amount of the Metals USA Notes. The Metals USA Notes bear interest at a rate per annum equal to 11 1/8%, payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on June 1, 2006. The Metals USA Notes will mature on December 1, 2015. We may redeem some or all of the Metals USA Notes at any time on or after December 1, 2010 at a predetermined redemption price plus accrued and unpaid interest and additional interest, if any, to the applicable redemption date. If we experience a change of control and we do not
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redeem the Metals USA Notes, we will be required to make an offer to repurchase the Metals USA Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
As a result of the Merger, Metals USA assumed the obligations of Flag Acquisition including the Metals USA Notes. All domestic operating subsidiaries of Metals USA have agreed, jointly and severally with Flag Intermediate (Guarantors), to unconditionally and irrevocably guarantee Metals USAs obligations under the Metals USA Notes and Indenture dated as of November 30, 2005. Additionally, Flag Intermediate has unconditionally guaranteed to be a primary obligor of the due and punctual payment and performance of the obligations under the Indenture.
Metals USA Holdings is not a guarantor of the Metals USA Notes. There is a limitation on the amount of funds which can be transferred by the Guarantors to Metals USA Holdings in the form of dividends. Such amount available for distribution shall be increased by an amount equal to 50% of Consolidated Net Income, as defined, or reduced by an amount equal to 100% of Consolidated Net Loss, as defined. As of September 30, 2011, $22.8 was available for general distribution under the restricted payment covenant contained in the Indenture governing the Metals USA Notes.
The indebtedness evidenced by the Metals USA Notes and the guarantees will rank: equally with all of our and the Guarantors existing and future senior indebtedness; junior in priority as to collateral that secures the ABL facility on a first-priority lien basis with respect to our and the Guarantors obligations under the ABL facility, any other debt incurred after December 1, 2005 that has a priority security interest relative to the Metals USA Notes in the collateral that secures the ABL facility, any hedging obligations related to the foregoing debt and all cash management obligations incurred with any lender under the ABL facility; equal in priority as to collateral that secures the Metals USA Notes and the guarantees on a first-priority lien basis with respect to our and the Guarantors obligations under any other equivalent priority lien obligations incurred after December 1, 2005; and senior to all of our and the Guarantors existing and future subordinated indebtedness. The Metals USA Notes will also be effectively junior to the liabilities of any non-guarantor subsidiaries.
The Metals USA Notes contain covenants that are customary for similar debt instruments, including limitations on our or the Guarantors ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases with respect to capital stock, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates.
The Metals USA Notes Indenture contains certain customary events of default, including (subject, in some cases, to customary cure periods thresholds) defaults based on (1) the failure to make payments under the Metals USA Notes Indenture when due, (2) breach of covenants, (3) cross-defaults to other material indebtedness, (4) bankruptcy events and (5) material judgments.
Costs related to the establishment of the Metals USA Notes were capitalized and are being charged to interest expense over the life of the Metals USA Notes. Unamortized issuance costs of $3.0 and $3.6 were included in other non-current assets as of September 30, 2011 and December 31, 2010, respectively.
Industrial Revenue Bonds
Metals USA is a conduit bond obligor on IRBs issued by the municipalities of Muskogee, Oklahoma and Jeffersonville, Indiana. The IRBs are secured by certain real estate, leasehold improvements and equipment acquired with proceeds from the IRBs. The Muskogee IRB is due in one lump sum of $5.7 on May 1, 2023. The Jeffersonville IRBs had principal amounts outstanding of $2.9 and $4.2 as of September 30, 2011, and are being redeemed in varying amounts annually through August 2021 and December 2027, respectively. The interest rates assessed on the IRBs vary from month to month. As of September 30, 2011, the weighted average variable interest rate on the IRBs was 0.34%. See Note 5 for a discussion of fixed interest rates payable on the Jeffersonville IRBs under interest rate swap agreements.
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Intercompany Loan Agreement
Metals USA Holdings has made advances to Metals USA through an intercompany loan agreement, as amended, (the Loan Agreement), which totaled $47.0 as of September 30, 2011 and December 31, 2010. The advances have been primarily to accommodate working capital expansion and the J. Rubin acquisition discussed in Note 2. In June 2011, the Loan Agreement was amended to extend the maturity date to June 15, 2017, and to modify the rate at which borrowings under the Loan Agreement bear interest to LIBOR plus 6.00% per annum. For the three and nine months ended September 30, 2011, Metals USA recognized $1.1 and $4.5 of interest expense related to the Loan Agreement. For the three and nine months ended September 30, 2010, Metals USA recognized $0.8 and $1.0 of interest expense related to the Loan Agreement.
9. Stockholders Equity
Common Stock
In accordance with its certificate of incorporation dated November 3, 2005, Flag Intermediate was authorized to issue 100 shares of capital stock, all of which were shares of common stock, $.01 par value. All such shares are issued and outstanding at September 30, 2011, and are owned by Metals USA Holdings through Flag Intermediate, its wholly-owned subsidiary.
10. Stock-Based Compensation
Total stock-based compensation expense recognized for the three and nine months ended September 30, 2011 was $0.4 and $1.2, respectively. Total stock-based compensation expense recognized for the three and nine months ended September 30, 2010 was $0.5 and $0.7, respectively. Stock-based compensation expense is included in our condensed consolidated statements of operations in selling, general and administrative expense.
2005 Stock and Incentive Plan
Metals USA Holdings Amended and Restated 2005 Stock and Incentive Plan (the 2005 Plan) permits the issuance of options and restricted stock awards to employees and directors of the Company. The 2005 Plan has reserved for issuance up to 2.4 million shares of common stock. The 2005 Plan has two tranches of options, Tranche A and Tranche B. Tranche A options vest on a pro-rata basis over five years, have a term of ten years, and expire if not exercised. Tranche B options, which include both a service and a performance condition, vest on the eighth anniversary of the date of grant or earlier dependent on the satisfaction of an internal rate of return on capital invested, have a term of ten years from date of grant, and expire if not exercised.
Tranche A Options
As of September 30, 2011, Tranche A options for 401,232 shares were outstanding, 389,553 of which were exercisable. The weighted average exercise price of these options is $3.21 per share, with an aggregate intrinsic value of $2.3. The Tranche A options have a weighted average remaining contractual life of approximately 4.3 years. Compensation expense associated with the Tranche A options has been fully recognized as of September 30, 2011.
Tranche B Options
As of September 30, 2011, Tranche B options for 47,112 shares were outstanding, all of which were exercisable. The weighted average exercise price of these options is $2.30 per share, with an aggregate intrinsic value of $0.3. The Tranche B options have a weighted average remaining contractual life of approximately 4.2 years. Compensation expense associated with the Tranche B options has been fully recognized as of September 30, 2011.
20
2010 Long-Term Incentive Plan
On March 19, 2010, Metals USA Holdings Board of Directors adopted, and its stockholders approved, the Metals USA Holdings 2010 Long-Term Incentive Plan (the 2010 Plan). The purposes of the 2010 Plan are to further the growth and success of Metals USA and to reward and incentivize the outstanding performance of our key employees, directors, consultants and other service providers by aligning their interests with those of stockholders through equity-based compensation and enhanced opportunities for ownership of shares of Metals USA Holdings common stock.
Subject to adjustment, the 2010 Plan authorizes the issuance of up to 2.6 million shares of common stock pursuant to the grant or exercise of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards.
The 2010 Plan is administered by Metals USA Holdings Board of Directors or the Compensation Committee thereof, or such other committee of the Board of Directors as the Board of Directors may designate from time to time (the Committee). Among other things, the Committee has the authority to select individuals to whom awards may be granted, to determine the type of award, to determine the terms and conditions of any such awards, including vesting terms, to interpret the terms and provisions of the 2010 Plan and awards granted thereunder and to otherwise administer the plan.
Stock Options
On September 13, 2010, pursuant to the 2010 Plan, 632,000 options to acquire the Metals USA Holdings common stock were granted to certain members of our management and to members of the Board of Directors with an exercise price equal to the fair market value as of the date of the grant. The options granted to management vest ratably over four years and have a contractual term of ten years. The options granted to the members of the Board of Directors vest ratably over three years and also have a contractual term of ten years.
The fair value of the 2010 Plan option awards was estimated on the date of grant using a Black-Scholes option valuation model using the following valuation assumptions:
Expected dividend yield |
0 | % | ||
Expected stock price volatility |
62.5 | % | ||
Risk free interest rate |
1.51 | % | ||
Expected life (in years)management options |
5.0 | |||
Expected life (in years)Board of Director options |
4.0 | |||
Exercise price |
$ | 13.17 |
As of September 30, 2011, outstanding options granted under the 2010 Plan had no intrinsic value (i.e. the fair market value of the Companys common stock was less than the options exercise price), with approximately $2.8 of total unrecognized compensation expense remaining to be amortized over a weighted average period of 2.6 years.
Restricted Stock
On September 13, 2010, pursuant to the 2010 Plan, 130,100 shares of restricted stock were granted to certain members of our management and to members of our Board of Directors. The awards granted to management vest ratably over four years, while the awards granted to the members of our Board of Directors vest ratably over three years. The fair value of the restricted stock granted was $13.17 per share, determined based on the fair value of the Companys common stock on the grant date. During the three months ended September 30, 2011, 34,394 shares of restricted stock vested. As of September 30, 2011, approximately $1.1 of total unrecognized compensation expense was expected to be recognized over a weighted average period of 2.6 years.
21
11. Income Taxes
The provision for income taxes is determined by applying an estimated annual effective income tax rate to income before income taxes. The rate is based on the most recent annualized forecast of pretax income, permanent book differences and tax credits. The Companys effective tax rate for the nine months ended September 30, 2011 was 37.3% compared to an effective tax rate of 45.7% for the nine months ended September 30, 2010. The decrease in the tax rate in 2011 is primarily due to the impact of state taxes and permanent items on the respective levels of pre-tax book income.
As of September 30, 2011 and December 31, 2010, our unrecognized tax benefits totaled $8.7, and based on the contingent and uncertain nature of our liability, we are unable to make an estimate of the period of potential cash settlement, if any, with the respective taxing authorities. The total amount of unrecognized tax benefits that, if recognized, would impact the Companys effective tax rate is $0.2 for the nine months ended September 30, 2011.
We file numerous consolidated and separate income tax returns in the United States and Canada. We are no longer subject to U.S. Federal income tax examinations for years before 2006 and are no longer subject to state and local, or foreign income tax examinations for years before 2000.
We account for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. As of September 30, 2011, the liability for uncertain tax positions includes interest and penalties of $2.9 of which $0.2 is included in our statement of operations and impacted the Companys overall effective income tax rate for the nine months ended September 30, 2011.
22
12. Segment Information
The following tables show summarized financial information for our reportable segments. The amounts shown as an operating loss under the column heading Corporate and Other consist primarily of general and administrative costs that are not allocated to the segments. The reconciliation of operating income to net income before income taxes is shown within the condensed consolidated statements of operations and therefore is not separately presented.
Three Months Ended September 30, | ||||||||||||||||||||
Plates and Shapes |
Flat Rolled and Non-Ferrous |
Building Products |
Corporate and Other |
Total | ||||||||||||||||
2011: |
||||||||||||||||||||
Net sales |
$ | 191.3 | $ | 279.7 | $ | 24.7 | $ | (3.4 | ) | $ | 492.3 | |||||||||
Operating income (loss) |
20.0 | 20.6 | 0.9 | (6.2 | ) | 35.3 | ||||||||||||||
Capital expenditures |
1.9 | 4.5 | | | 6.4 | |||||||||||||||
Depreciation and amortization(1) |
2.4 | 2.5 | 0.5 | 0.1 | 5.5 | |||||||||||||||
2010: |
||||||||||||||||||||
Net sales |
$ | 144.4 | $ | 180.1 | $ | 23.2 | $ | (2.4 | ) | $ | 345.3 | |||||||||
Operating income (loss) |
9.7 | 12.1 | 1.2 | (4.1 | ) | 18.9 | ||||||||||||||
Capital expenditures |
0.5 | 0.1 | | 0.2 | 0.8 | |||||||||||||||
Depreciation and amortization(1) |
2.3 | 1.7 | 0.6 | 0.3 | 4.9 |
Nine Months Ended September 30, | ||||||||||||||||||||
Plates and Shapes |
Flat Rolled and Non-Ferrous |
Building Products |
Corporate and Other |
Total | ||||||||||||||||
2011: |
||||||||||||||||||||
Net sales |
$ | 588.1 | $ | 785.7 | $ | 66.1 | $ | (9.7 | ) | $ | 1,430.2 | |||||||||
Operating income (loss) |
67.1 | 60.8 | 0.3 | (19.7 | ) | 108.5 | ||||||||||||||
Capital expenditures |
4.2 | 5.6 | 0.1 | 0.2 | 10.1 | |||||||||||||||
Depreciation and amortization(1) |
7.3 | 7.5 | 1.6 | 0.5 | 16.9 | |||||||||||||||
2010: |
||||||||||||||||||||
Net sales |
$ | 402.8 | $ | 509.1 | $ | 63.7 | $ | (7.4 | ) | $ | 968.2 | |||||||||
Operating income (loss) |
30.2 | 36.2 | 0.1 | (17.5 | ) | 49.0 | ||||||||||||||
Capital expenditures |
1.6 | 0.4 | | 0.2 | 2.2 | |||||||||||||||
Depreciation and amortization(1) |
7.0 | 5.2 | 1.8 | 0.9 | 14.9 |
(1) | Includes depreciation expense reflected in cost of goods sold for the Building Products Group. |
September 30, 2011 |
December 31, 2010 |
|||||||
Total Assets: |
||||||||
Plates and Shapes |
$ | 358.8 | $ | 328.1 | ||||
Flat Rolled and Non-Ferrous |
545.4 | 329.8 | ||||||
Building Products |
40.8 | 38.7 | ||||||
Corporate and Other |
32.5 | 47.5 | ||||||
|
|
|
|
|||||
Consolidated |
$ | 977.5 | $ | 744.1 | ||||
|
|
|
|
For the three months ended September 30, 2011, ORMS and Trident contributed a combined $54.3 and $3.9 of incremental net sales and operating income, respectively, versus the same period of 2010. For the nine months ended September 30, 2011, J. Rubin, ORMS and Trident contributed a combined $140.2 and $9.2 of incremental net sales and operating income, respectively, versus the same period of 2010.
23
During the nine months ended September 30, 2011, our Building Products Segment recorded a gain of approximately $0.7 resulting from a settlement with the previous owners of the Dura-Loc (now Allmet) roofing business we acquired in 2006 to cover pre-acquisition warranty claims.
13. Commitments and Contingencies
Letters of Credit
Letters of credit outstanding at September 30, 2011 amounted to $25.9 and consisted primarily of letters of credit issued in conjunction with the IRBs (see Note 8) and other letters of credit that support our property and casualty insurance program. All letters of credit reduce the amount available to borrow under the ABL facility.
Pension Fund Withdrawal Obligation
During 2007, we discontinued our participation in a multiemployer pension fund. In connection with our cessation of contributions to the plan, we were assessed a withdrawal liability of approximately $5.6, which we are paying in monthly installments through 2021. Our total withdrawal liability, including interest and amortization charges, amounted to approximately $6.2 and $6.7 as of September 30, 2011 and December 31, 2010, respectively.
Contingencies
From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations, cash flows or liquidity.
14. Related Party Transactions
Intercompany Loan Agreement
Metals USA Holdings has made advances to Metals USA through an intercompany loan agreement. See Note 8.
Payable to Parent
In addition, Metals USA has recorded a payable to Metals USA Holdings in the amount of $6.1 as of September 30, 2011 and December 31, 2010, for the receipt of a Federal income tax refund during the year ended December 31, 2010.
Other amounts payable to Metals USA Holdings as of September 30, 2011 are the result of routine intercompany transactions.
15. Comprehensive Income
The following table sets forth comprehensive income, net of applicable taxes, for the three and nine months ended September 30, 2011 and 2010.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 16.0 | $ | 5.0 | $ | 47.9 | $ | 11.7 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustments |
(0.3 | ) | 0.1 | (0.3 | ) | 0.1 | ||||||||||
Unrealized gains on derivatives |
| 0.1 | 0.1 | 0.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total comprehensive income |
$ | 15.7 | $ | 5.2 | $ | 47.7 | $ | 12.3 | ||||||||
|
|
|
|
|
|
|
|
24
16. Guarantor/Non-Guarantor Subsidiary Financial Information
In November 2005, the Company issued the Metals USA Notes which are guaranteed by its domestic operating subsidiaries (see Note 8). The following presents condensed consolidating financial information for the parent company, Flag Intermediate, a holding company with no operations other than through its subsidiaries, and Metals USA, a management holding company which wholly owns the guarantor and non-guarantor subsidiaries, as of September 30, 2011 and December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010.
As of September 30, 2011 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash |
$ | | $ | 1.0 | $ | 6.8 | $ | 0.5 | $ | | $ | 8.3 | ||||||||||||
Accounts receivable, net |
| | 234.5 | 1.2 | (0.5 | ) | 235.2 | |||||||||||||||||
Inventories |
| | 382.5 | 1.2 | | 383.7 | ||||||||||||||||||
Deferred income tax asset |
| 3.9 | 5.3 | | | 9.2 | ||||||||||||||||||
Prepayments and other |
| 0.1 | 4.4 | | | 4.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
| 5.0 | 633.5 | 2.9 | (0.5 | ) | 640.9 | |||||||||||||||||
Property and equipment, net |
| | 239.0 | 2.4 | | 241.4 | ||||||||||||||||||
Intangible assets, net |
| | 27.1 | 0.1 | | 27.2 | ||||||||||||||||||
Goodwill |
| 4.2 | 47.2 | 2.2 | | 53.6 | ||||||||||||||||||
Investment in subsidiaries |
207.0 | 941.1 | | | (1,148.1 | ) | | |||||||||||||||||
Other assets |
| 13.2 | 1.2 | | | 14.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 207.0 | $ | 963.5 | $ | 948.0 | $ | 7.6 | $ | (1,148.6 | ) | $ | 977.5 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 96.7 | $ | 0.3 | $ | (2.2 | ) | $ | 94.8 | |||||||||||
Accrued liabilities |
| 14.0 | 25.2 | 0.6 | | 39.8 | ||||||||||||||||||
Payable to parent |
| 10.2 | | | | 10.2 | ||||||||||||||||||
Current portion of long-term debt |
| 0.4 | 0.6 | | | 1.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
| 24.6 | 122.5 | 0.9 | (2.2 | ) | 145.8 | |||||||||||||||||
Long-term debt, less current portion |
| 470.9 | 12.7 | | | 483.6 | ||||||||||||||||||
Deferred income tax liability |
| 30.0 | 41.6 | | | 71.6 | ||||||||||||||||||
Due to parent |
| 47.0 | | | | 47.0 | ||||||||||||||||||
Intercompany payable (receivable) |
| 168.8 | (215.0 | ) | 44.5 | 1.7 | | |||||||||||||||||
Other long-term liabilities |
| 15.2 | 6.8 | 0.5 | | 22.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
| 756.5 | (31.4 | ) | 45.9 | (0.5 | ) | 770.5 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||||||
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at September 30, 2011 |
| | | | | | ||||||||||||||||||
Additional paid-in capital |
128.2 | 128.2 | 642.6 | 23.1 | (793.9 | ) | 128.2 | |||||||||||||||||
Retained earnings (accumulated deficit) |
78.6 | 78.6 | 336.4 | (61.4 | ) | (353.6 | ) | 78.6 | ||||||||||||||||
Accumulated other comprehensive income |
0.2 | 0.2 | 0.4 | | (0.6 | ) | 0.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity (deficit) |
207.0 | 207.0 | 979.4 | (38.3 | ) | (1,148.1 | ) | 207.0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 207.0 | $ | 963.5 | $ | 948.0 | $ | 7.6 | $ | (1,148.6 | ) | $ | 977.5 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
As of December 31, 2010 |
Flag Intermediate Holdings Corp. |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash |
$ | | $ | 12.5 | $ | 2.0 | $ | 0.7 | $ | | $ | 15.2 | ||||||||||||
Accounts receivable |
| 0.3 | 148.1 | 1.1 | (0.2 | ) | 149.3 | |||||||||||||||||
Inventories |
| | 289.6 | 1.2 | | 290.8 | ||||||||||||||||||
Deferred income tax asset |
| 12.0 | | | | 12.0 | ||||||||||||||||||
Prepayments and other |
| 2.1 | 7.7 | | | 9.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
| 26.9 | 447.4 | 3.0 | (0.2 | ) | 477.1 | |||||||||||||||||
Property and equipment, net |
| 1.9 | 194.4 | 2.5 | | 198.8 | ||||||||||||||||||
Intangible assets, net |
| | 7.1 | 0.3 | | 7.4 | ||||||||||||||||||
Goodwill |
| 5.8 | 39.3 | 2.2 | | 47.3 | ||||||||||||||||||
Investment in subsidiaries, net |
158.1 | 879.8 | | | (1,037.9 | ) | | |||||||||||||||||
Other assets |
| 13.0 | 0.5 | | | 13.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 158.1 | $ | 927.4 | $ | 688.7 | $ | 8.0 | $ | (1,038.1 | ) | $ | 744.1 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 0.9 | $ | 65.7 | $ | 0.2 | $ | (0.2 | ) | $ | 66.6 | |||||||||||
Accrued liabilities |
| 17.8 | 13.6 | 0.2 | | 31.6 | ||||||||||||||||||
Payable to parent |
| 9.6 | | | | 9.6 | ||||||||||||||||||
Current portion of long-term debt |
| | 1.1 | | | 1.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
| 28.3 | 80.4 | 0.4 | (0.2 | ) | 108.9 | |||||||||||||||||
Long-term debt, less current portion |
| 332.3 | 13.1 | | | 345.4 | ||||||||||||||||||
Deferred income tax liability |
| 59.2 | 3.3 | | | 62.5 | ||||||||||||||||||
Intercompany payable (receivable) |
| 331.4 | (330.0 | ) | 45.6 | | 47.0 | |||||||||||||||||
Other long-term liabilities |
| 18.1 | 3.6 | 0.5 | | 22.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
| 769.3 | (229.6 | ) | 46.5 | (0.2 | ) | 586.0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Stockholders equity (deficit): |
||||||||||||||||||||||||
Common stock, $.01 par value, 100 shares authorized, issued and outstanding at December 31, 2010 |
| | | | | | ||||||||||||||||||
Additional paid-in capital |
127.0 | 127.0 | 705.7 | 23.1 | (855.8 | ) | 127.0 | |||||||||||||||||
Retained earnings (accumulated deficit) |
30.7 | 30.7 | 212.6 | (61.6 | ) | (181.7 | ) | 30.7 | ||||||||||||||||
Accumulated other comprehensive income |
0.4 | 0.4 | | | (0.4 | ) | 0.4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity (deficit) |
158.1 | 158.1 | 918.3 | (38.5 | ) | (1,037.9 | ) | 158.1 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 158.1 | $ | 927.4 | $ | 688.7 | $ | 8.0 | $ | (1,038.1 | ) | $ | 744.1 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
26
For the Three Months Ended September 30, 2011 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | | $ | 493.1 | $ | 2.6 | $ | (3.4 | ) | $ | 492.3 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
| | 381.4 | 1.8 | (3.4 | ) | 379.8 | |||||||||||||||||
Operating and delivery |
| 0.1 | 43.7 | 0.2 | | 44.0 | ||||||||||||||||||
Selling, general and administrative |
| 1.0 | 27.1 | 0.2 | | 28.3 | ||||||||||||||||||
Depreciation and amortization |
| | 5.0 | | | 5.0 | ||||||||||||||||||
Gain on sale of property and equipment |
| | (0.1 | ) | | | (0.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| (1.1 | ) | 36.0 | 0.4 | | 35.3 | |||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||
Interest expense |
| 10.1 | 0.3 | | | 10.4 | ||||||||||||||||||
Intercompany charges |
| (8.6 | ) | 8.3 | 0.3 | | | |||||||||||||||||
Equity in earnings of subsidiaries |
(16.0 | ) | (22.2 | ) | | | 38.2 | | ||||||||||||||||
Other expense, net |
| | 0.1 | | | 0.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
16.0 | 19.6 | 27.3 | 0.1 | (38.2 | ) | 24.8 | |||||||||||||||||
Provision for income taxes |
| 3.6 | 5.2 | | | 8.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 16.0 | $ | 16.0 | $ | 22.1 | $ | 0.1 | $ | (38.2 | ) | $ | 16.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2010 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | | $ | 343.5 | $ | 1.8 | $ | | $ | 345.3 | ||||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
| | 267.5 | 1.4 | | 268.9 | ||||||||||||||||||
Operating and delivery |
| 0.1 | 33.3 | 0.1 | | 33.5 | ||||||||||||||||||
Selling, general and administrative |
| 0.9 | 18.5 | 0.2 | | 19.6 | ||||||||||||||||||
Depreciation and amortization |
| 0.3 | 4.0 | 0.1 | | 4.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| (1.3 | ) | 20.2 | | | 18.9 | |||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||
Interest expense |
| 8.6 | 0.1 | | | 8.7 | ||||||||||||||||||
Intercompany charges |
| (10.6 | ) | 11.2 | 0.2 | | 0.8 | |||||||||||||||||
Equity in earnings of subsidiaries |
(5.0 | ) | (8.7 | ) | | | 13.7 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
5.0 | 9.4 | 8.9 | (0.2 | ) | (13.7 | ) | 9.4 | ||||||||||||||||
Provision for income taxes |
| 4.4 | | | | 4.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 5.0 | $ | 5.0 | $ | 8.9 | $ | (0.2 | ) | $ | (13.7 | ) | $ | 5.0 | ||||||||||
|
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27
For the Nine Months Ended September 30, 2011 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | | $ | 1,433.7 | $ | 6.2 | $ | (9.7 | ) | $ | 1,430.2 | |||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
| | 1,097.9 | 4.2 | (9.7 | ) | 1,092.4 | |||||||||||||||||
Operating and delivery |
| 0.4 | 130.0 | 0.6 | | 131.0 | ||||||||||||||||||
Selling, general and administrative |
| 4.0 | 78.7 | 0.2 | | 82.9 | ||||||||||||||||||
Depreciation and amortization |
| | 15.3 | 0.1 | | 15.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| (4.4 | ) | 111.8 | 1.1 | | 108.5 | |||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||
Interest expense |
| 31.7 | 0.4 | | | 32.1 | ||||||||||||||||||
Intercompany charges |
| (22.7 | ) | 21.9 | 0.8 | | | |||||||||||||||||
Equity in earnings of subsidiaries |
(47.9 | ) | (62.0 | ) | | | 109.9 | | ||||||||||||||||
Other expense, net |
| | 0.1 | | | 0.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
47.9 | 48.6 | 89.4 | 0.3 | (109.9 | ) | 76.3 | |||||||||||||||||
Provision (benefit) for income taxes |
| 0.7 | 27.7 | | | 28.4 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 47.9 | $ | 47.9 | $ | 61.7 | $ | 0.3 | $ | (109.9 | ) | $ | 47.9 | |||||||||||
|
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|
|
|
|
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|
|
|
|
For the Nine Months Ended September 30, 2010 |
Flag Intermediate Holdings Corp. |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | | $ | 962.5 | $ | 5.7 | $ | | $ | 968.2 | ||||||||||||
Operating costs and expenses: |
||||||||||||||||||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
| | 740.0 | 4.5 | | 744.5 | ||||||||||||||||||
Operating and delivery |
| 0.5 | 96.8 | 0.4 | | 97.7 | ||||||||||||||||||
Selling, general and administrative |
| 2.9 | 57.0 | 0.5 | | 60.4 | ||||||||||||||||||
Depreciation and amortization |
| 0.9 | 12.2 | 0.3 | | 13.4 | ||||||||||||||||||
Gain on sale of equipment |
| | (0.1 | ) | | | (0.1 | ) | ||||||||||||||||
Advisory agreement termination charge |
| 3.3 | | | | 3.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| (7.6 | ) | 56.6 | | | 49.0 | |||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||
Interest expense |
| 26.2 | 0.2 | | | 26.4 | ||||||||||||||||||
Intercompany charges |
| (33.4 | ) | 33.7 | 0.7 | | 1.0 | |||||||||||||||||
Equity in earnings of subsidiaries |
(11.7 | ) | (22.0 | ) | | | 33.7 | | ||||||||||||||||
|
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|
|
|
|
|
|
|
|||||||||||||
Income (loss) before income taxes |
11.7 | 21.6 | 22.7 | (0.7 | ) | (33.7 | ) | 21.6 | ||||||||||||||||
Provision for income taxes |
| 9.9 | | | | 9.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 11.7 | $ | 11.7 | $ | 22.7 | $ | (0.7 | ) | $ | (33.7 | ) | $ | 11.7 | ||||||||||
|
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28
For the Nine Months Ended September 30, 2011 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | | $ | (33.6 | ) | $ | (7.7 | ) | $ | 0.7 | $ | (1.7 | ) | $ | (42.3 | ) | ||||||||
|
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|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Sales of assets |
| | 0.2 | | | 0.2 | ||||||||||||||||||
Purchases of assets |
| (0.2 | ) | (9.9 | ) | | | (10.1 | ) | |||||||||||||||
Acquisition costs, net of cash acquired |
| | (88.1 | ) | | | (88.1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
| (0.2 | ) | (97.8 | ) | | | (98.0 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings on credit facility |
| 180.1 | | | | 180.1 | ||||||||||||||||||
Repayments on credit facility |
| (42.7 | ) | | | | (42.7 | ) | ||||||||||||||||
Repayments of long-term debt |
| | (1.1 | ) | | | (1.1 | ) | ||||||||||||||||
Deferred financing costs |
| (2.9 | ) | | | | (2.9 | ) | ||||||||||||||||
Net change in intercompany balances |
| (112.2 | ) | 111.4 | (0.9 | ) | 1.7 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) financing activities |
| 22.3 | 110.3 | (0.9 | ) | 1.7 | 133.4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net (decrease) increase in cash |
| (11.5 | ) | 4.8 | (0.2 | ) | | (6.9 | ) | |||||||||||||||
Cash, beginning of period |
| 12.5 | 2.0 | 0.7 | | 15.2 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash, end of period |
$ | | $ | 1.0 | $ | 6.8 | $ | 0.5 | $ | | $ | 8.3 | ||||||||||||
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|
For the Nine Months Ended September 30, 2010 |
Flag Intermediate Holdings Corporation |
Metals USA, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Adjustments & Eliminations |
Consolidated | ||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 0.5 | $ | 22.0 | $ | (42.7 | ) | $ | (0.7 | ) | $ | | $ | (20.9 | ) | |||||||||
|
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|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Sale of assets |
| | 0.2 | | | 0.2 | ||||||||||||||||||
Purchase of assets |
| | (2.2 | ) | | | (2.2 | ) | ||||||||||||||||
Acquisition costs, net of cash acquired |
| | (19.0 | ) | | | (19.0 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
| | (21.0 | ) | | | (21.0 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings on the ABL |
| 60.0 | | | | 60.0 | ||||||||||||||||||
Repayments on the ABL |
| (59.5 | ) | | | | (59.5 | ) | ||||||||||||||||
Repayments of other long-term debt |
| | (0.1 | ) | | | (0.1 | ) | ||||||||||||||||
Net change in intercompany balances |
(0.5 | ) | (17.8 | ) | 64.6 | 0.7 | | 47.0 | ||||||||||||||||
Excess tax benefits from stock-based compensation |
| 0.1 | | | | 0.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash (used in) provided by financing activities |
(0.5 | ) | (17.2 | ) | 64.5 | 0.7 | | 47.5 | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|||||||||||||
Net increase in cash |
| 4.8 | 0.8 | | | 5.6 | ||||||||||||||||||
Cash, beginning of period |
| 4.5 | 0.6 | 0.4 | | 5.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash, end of period |
$ | | $ | 9.3 | $ | 1.4 | $ | 0.4 | $ | | $ | 11.1 | ||||||||||||
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29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See disclosure presented on the inside of the front cover of this Form 10-Q for cautionary information with respect to such forward-looking statements. Readers should refer to Risk Factors included in our Annual Report on Form 10-K for risk factors that may affect future performance.
Overview
All references to the Company, we or our include Flag Intermediate, its wholly-owned subsidiary Metals USA, and the wholly-owned subsidiaries of Metals USA.
We believe that we are a leading provider of value-added processed carbon steel, stainless steel, aluminum and specialty metals, as well as manufactured metal components. For the nine months ended September 30, 2011, approximately 95% of our revenue was derived from our metals service center and processing activities, which are segmented into two groups: Flat Rolled and Non-Ferrous Group and Plates and Shapes Group. The remaining portion of our revenue was derived from our Building Products Group, which principally manufactures and sells aluminum products related to the residential remodeling industry. We purchase metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet the specifications provided by end-users. Our Plates and Shapes Group and Flat Rolled and Non-Ferrous Group customers are in multiple industries including aerospace, automotive industry manufacturing, defense, heavy equipment, marine transportation, commercial construction, office furniture manufacturing, and energy and oilfield services. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.
Industry Trends
Metals Service Centers
U.S. steel consumption declined dramatically during the 2009 recession. 2009 U.S. steel consumption was less than 70% of 2008 U.S. steel consumption and significantly outpaced GDP declines. Consequently, annual growth in steel demand in 2010 exceeded prior year figures by more than 14% as U.S. industrial production recovered slowly. 2010 domestic steel mill utilization rates averaged approximately 70%. During the first nine months of 2011, domestic steel mill utilization rates increased slightly, averaging approximately 73%. North American steel consumption is forecasted to increase by approximately 11% during 2011 as most steel consuming industries continue a modest recovery.
World steel production resumed growth in 2010 following the 2009 global recession. China has continued to dominate global steel production and consumption, accounting for roughly half of the total global steel market. Chinese steel production levels and growth characteristics have created significant demand on iron ore and metallurgical coal which has generally outpaced global supply. As a result, merchant prices for both iron ore and metallurgical coal have persistently trended higher and now trade near historical peaks. We believe this upward price trend will continue.
During the first nine months of 2011, steel prices have been relatively stable when compared to the significantly volatile periods of 2008, 2009 and 2010. Given current market conditions, steel prices are predominately influenced by raw material input costs, namely iron ore and metallurgical coal. We believe that in the absence of any unanticipated macro-economic disruptions, no near term catalyst that would materially alter current price trends is visible on the horizon.
30
Building Products
The downturn in the housing and mortgage markets has caused significant contraction in the home improvement remodeling industry. Research indicates that remodeling activity is pro-cyclical with both new residential construction and the broader economy, but remodeling lags homebuilding by several quarters. The high cyclicality of remodeling activity appears to be driven by discretionary improvements, similar to the products sold by our building products business, which are quite volatile. Improvement spending is expected to be much more cyclical and more sensitive to upturns and downturns in the general economy, whereas maintenance and repair spending is expected to be fairly stable over time.
While the pace of the decline in homeowner remodeling projects appears to be moderating, increased remodeling activity does not seem likely to materialize until further signs of recovery emerge in the broader housing market. Although lower financing costs are reducing the cost of financing home improvement projects, weak home prices and decreased cost recovery for most types of remodeling projects continue to discourage upper-end remodeling improvements.
Product demand for the Companys Building Products Group may be influenced by numerous factors such as interest rates, general economic conditions, consumer confidence and other factors beyond our control. Declines in existing home sales and improvement remodeling expenditures due to such factors could continue to limit the pace of the segments recovery.
Results of Operations
The following unaudited consolidated financial information reflects our historical financial statements.
Consolidated ResultsThree Months Ended September 30, 2011 Compared to September 30, 2010
2011 | % | 2010 | % | |||||||||||||
(In millions, except percentages) | ||||||||||||||||
Net sales |
$ | 492.3 | 100.0 | % | $ | 345.3 | 100.0 | % | ||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
379.8 | 77.1 | % | 268.9 | 77.9 | % | ||||||||||
Operating and delivery |
44.0 | 8.9 | % | 33.5 | 9.7 | % | ||||||||||
Selling, general and administrative |
28.3 | 5.7 | % | 19.6 | 5.7 | % | ||||||||||
Depreciation and amortization |
5.0 | 1.0 | % | 4.4 | 1.3 | % | ||||||||||
Gain on sale of assets |
(0.1 | ) | 0.0 | % | | | ||||||||||
|
|
|
|
|||||||||||||
Operating income |
35.3 | 7.2 | % | 18.9 | 5.5 | % | ||||||||||
Interest expense |
10.4 | 2.1 | % | 9.5 | 2.8 | % | ||||||||||
Other expense, net |
0.1 | 0.0 | % | | | |||||||||||
|
|
|
|
|||||||||||||
Income before income taxes |
24.8 | 5.0 | % | 9.4 | 2.7 | % | ||||||||||
|
|
|
|
Net sales. Net sales increased $147.0 million, or 42.6%, from $345.3 million for the three months ended September 30, 2010 to $492.3 million for the three months ended September 30, 2011. The increase was primarily attributable to a 24.9% increase in shipments, in addition to a 16.2% increase in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups. Net sales for our Building Products Group increased $1.5 million, or 6.5%, for the third quarter of 2011 versus the third quarter of 2010. Results for the quarter ended September 30, 2011 include operating results from the Trident acquisition which closed on March 11, 2011, and the ORMS acquisition which closed on December 31, 2010. Trident and ORMS contributed a combined $54.3 million of incremental sales for the quarter ended September 30, 2011. Excluding the Trident and ORMS acquisitions, net sales increased $92.7 million, or 28.8% for the quarter ended September 30, 2011 versus the same quarter of 2010, which primarily resulted from a 14.9% increase in average realized prices and
31
an 11.7% increase in shipments. Markets exhibited sufficient supply tightness to sustain modestly higher prices in the most recent quarter. The increase in volumes occurred as a consequence of increased demand in core steel consuming end-use markets which include energy and oilfield services, heavy equipment and automotive industry manufacturers, lawn and garden equipment manufacturers, truck transportation and household appliance manufacturers, while growth in non-residential construction and marine transportation markets continues to be slow. In addition to the volume and price increases discussed above, the year-over-year increase in net sales resulted from continued optimization of the Companys product mix to better match demand in certain markets and to differentiate our products and services from competitors.
Cost of sales. Cost of sales increased $110.9 million, or 41.2%, from $268.9 million for the three months ended September 30, 2010 to $379.8 million for the three months ended September 30, 2011. The increase was primarily attributable to a 24.9% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, in addition to a 14.5% increase in average cost per ton. Cost of sales for our Building Products Group increased $1.9 million, or 12.2%. The Trident and ORMS acquisitions added a combined $40.9 million of incremental cost of sales for the quarter ended September 30, 2011. Excluding the Trident and ORMS acquisitions, average cost per ton increased 13.6% and shipments increased 11.7% over the same period of 2010. The increase in average cost per ton was largely attributable to higher steelmaking raw material prices, which are a significant driver of steel price trends. The increase in volumes that contributed to higher cost of sales during the third quarter of 2011 was primarily attributable to an increase in steel demand in certain sectors, as discussed above. Cost of sales as a percentage of net sales decreased from 77.9% for the three months ended September 30, 2010 to 77.1% for the same period of 2011.
Operating and delivery. Operating and delivery expenses increased $10.5 million, or 31.3%, from $33.5 million for the three months ended September 30, 2010 to $44.0 million for the three months ended September 30, 2011. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $3.9 million and higher freight costs of approximately $2.4 million. In addition, Trident and ORMS added a combined $4.4 million of incremental operating and delivery expenses for the third quarter of 2011. As a percentage of net sales, operating and delivery expenses decreased from 9.7% for the three months ended September 30, 2010 to 8.9% for the three months ended September 30, 2011.
Selling, general and administrative. Selling, general and administrative expenses increased $8.7 million, or 44.4%, from $19.6 million for three months ended September 30, 2010 to $28.3 million for the three months ended September 30, 2011. Higher salaries of approximately $2.4 million in addition to an approximate $2.1 million increase in incentive compensation contributed to the period-over-period increase. Trident and ORMS added a combined $4.2 million of incremental selling, general and administrative expenses for the third quarter of 2011. As a percentage of net sales, selling, general and administrative expenses remained level at 5.7% for the three months ended September 30, 2011 and the three months ended September 30, 2010.
Depreciation and amortization. Depreciation and amortization expense increased $0.6 million, or 13.6%, from $4.4 million for the three months ended September 30, 2010 to $5.0 million for the three months ended September 30, 2011. The increase is primarily attributable to increases in fixed assets resulting from our growth through acquisitions over the past year and from increased capital spending, as our investments in new equipment have grown in line with higher business activity levels. Net property and equipment as of September 30, 2011 was $241.4 million compared to $183.2 million as of September 30, 2010. As a percentage of net sales, depreciation and amortization expenses decreased from 1.3% for the three months ended September 30, 2010 to 1.0% for the three months ended September 30, 2011.
Operating income. Operating income increased $16.4 million, or 86.8%, from $18.9 million for the three months ended September 30, 2010 to $35.3 million for the three months ended September 30, 2011. The increase was primarily a result of the increase in net sales discussed above, in addition to the impact associated with the acquisitions of Trident and ORMS, which contributed a combined $3.9 million of incremental operating income for the three months ended September 30, 2011. As a percentage of net sales, operating income increased from 5.5% for the three months ended September 30, 2010 to 7.2% for the three months ended September 30, 2011.
32
Interest expense. Interest expense increased $0.9 million, or 9.5%, from $9.5 million for the three months ended September 30, 2010 to $10.4 million for the three months ended September 30, 2011. The increase was due to higher borrowings and a higher average facility rate on the ABL facility. The weighted average outstanding balance on our ABL facility increased from $72.8 million for the three months ended September 30, 2010 to $242.1 million for the three months ended September 30, 2011. Borrowings under the ABL facility were used to fund the Trident and ORMS acquisitions, in addition to higher working capital needs between the two periods.
Consolidated ResultsNine Months Ended September 30, 2011 Compared to September 30, 2010
2011 | % | 2010 | % | |||||||||||||
(In millions, except percentages) | ||||||||||||||||
Net sales |
$ | 1,430.2 | 100.0 | % | $ | 968.2 | 100.0 | % | ||||||||
Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below) |
1,092.4 | 76.4 | % | 744.5 | 76.9 | % | ||||||||||
Operating and delivery |
131.0 | 9.2 | % | 97.7 | 10.1 | % | ||||||||||
Selling, general and administrative |
82.9 | 5.8 | % | 60.4 | 6.2 | % | ||||||||||
Depreciation and amortization |
15.4 | 1.1 | % | 13.4 | 1.4 | % | ||||||||||
Gain on sale of property and equipment |
| | (0.1 | ) | 0.0 | % | ||||||||||
Advisory agreement termination charge |
| | 3.3 | 0.3 | % | |||||||||||
|
|
|
|
|||||||||||||
Operating income |
108.5 | 7.6 | % | 49.0 | 5.1 | % | ||||||||||
Interest expense |
32.1 | 2.2 | % | 27.4 | 2.8 | % | ||||||||||
Other expense, net |
0.1 | 0.0 | % | | | |||||||||||
|
|
|
|
|||||||||||||
Income before income taxes |
76.3 | 5.3 | % | 21.6 | 2.2 | % | ||||||||||
|
|
|
|
Net sales. Net sales increased $462.0 million, or 47.7%, from $968.2 million for the nine months ended September 30, 2010 to $1,430.2 million for the nine months ended September 30, 2011. The increase was primarily attributable to a 35.0% increase in shipments, in addition to an 11.7% increase in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups. Net sales for our Building Products Group increased $2.4 million, or 3.8% for the nine months ended September 30, 2011 compared to the same period of 2010. Results for the nine months ended September 30, 2011 include operating results from the Trident acquisition, which closed on March 11, 2011, and the ORMS acquisition, which closed on December 31, 2010. In addition, results for the nine months ended September 30, 2011 include a full nine months of operating results from the J. Rubin acquisition, which closed on June 28, 2010. Trident, ORMS and J. Rubin contributed a combined $140.2 million of incremental sales for the nine months ended September 30, 2011. Excluding the Trident, ORMS and J. Rubin acquisitions, net sales increased $321.8 million, or 35.9%, for the nine months ended September 30, 2011 versus the same period of 2010, which primarily resulted from an 18.4% increase in shipments and a 14.6% increase in average realized prices. The increase in prices and volumes is attributable to the cyclical nature of the metal consuming industries supported by our products and services. The economic recovery that has continued through the first nine months of 2011 has translated into increased metal consumption as industrial production continues to gradually expand. We continue to experience weaker demand in industries tied to non-residential construction and offshore oil and gas drilling.
According to data from the Metals Service Center Institute, year-to-date actual shipments for the service center industry through September 2011 are up 15.9% over the same period of 2010. Inventory levels have remained relatively stable through the first nine months of 2011. Despite a cautious economic outlook, business conditions have remained generally favorable for the first nine months of 2011 compared to the same period of 2010.
Cost of sales. Cost of sales increased $347.9 million, or 46.7%, from $744.5 million for the nine months ended September 30, 2010 to $1,092.4 million for the nine months ended September 30, 2011. The increase was primarily attributable to a 35.0% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and
33
Shapes Product Groups, in addition to a 10.6% increase in average cost per ton. Cost of sales for our Building Products Group increased $3.2 million, or 7.2%. The Trident, ORMS and J. Rubin acquisitions added a combined $103.5 million of incremental cost of sales for the nine months ended September 30, 2011. Excluding the Trident, ORMS and J. Rubin acquisitions, shipments increased 18.4% and average cost per ton increased 13.8% over the same period of 2010. The increase in volumes that contributed to higher cost of sales during the first nine months of 2011 was primarily attributable to the factors that affected the increase in net sales discussed above. Cost of sales as a percentage of net sales decreased from 76.9% for the nine months ended September 30, 2010 to 76.4% for the same period of 2011.
Operating and delivery. Operating and delivery expenses increased $33.3 million, or 34.1%, from $97.7 million for the nine months ended September 30, 2010 to $131.0 million for the nine months ended September 30, 2011. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $13.2 million and higher freight costs of approximately $8.0 million. In addition, Trident, ORMS and J. Rubin added a combined $14.5 million of incremental operating and delivery expenses for the first nine months of 2011. As a percentage of net sales, operating and delivery expenses decreased from 10.1% for the nine months ended September 30, 2010 to 9.2% for the nine months ended September 30, 2011.
Selling, general and administrative. Selling, general and administrative expenses increased $22.5 million, or 37.3%, from $60.4 million for nine months ended September 30, 2010 to $82.9 million for the nine months ended September 30, 2011. Higher salaries of approximately $6.3 million in addition to an approximate $7.2 million increase in incentive compensation contributed to the period-over-period increase. Trident, ORMS and J. Rubin added a combined $10.3 million of incremental selling, general and administrative expenses for the first nine months of 2011. We also incurred costs of approximately $1.5 million during the first nine months of 2011 which were primarily attributable to the Trident acquisition, which closed in March 2011. As a percentage of net sales, selling, general and administrative expenses decreased from 6.2% for the nine months ended September 30, 2010 to 5.8% for the nine months ended September 30, 2011.
Depreciation and amortization. Depreciation and amortization expense increased $2.0 million, or 14.9%, from $13.4 million for the nine months ended September 30, 2010 to $15.4 million for the nine months ended September 30, 2011. The increase is primarily attributable to increases in fixed assets resulting from our growth through acquisitions over the past year and from increased capital spending, as our investments in new equipment have grown in line with higher business activity levels. Net property and equipment as of September 30, 2011 was $241.4 million compared to $183.2 million as of September 30, 2010. As a percentage of net sales, depreciation and amortization expenses decreased from 1.4% for the nine months ended September 30, 2010 to 1.1% for the nine months ended September 30, 2011.
Operating income. Operating income increased $59.5 million, or 121.4%, from $49.0 million for the nine months ended September 30, 2010 to $108.5 million for the nine months ended September 30, 2011. The increase was primarily a result of the increase in net sales discussed above, in addition to the impact associated with the acquisitions of Trident, ORMS and J. Rubin, which contributed a combined $9.2 million of incremental operating income for the nine months ended September 30, 2011. The increase in operating income during the first nine months of 2011 was also partially attributable to the absence of a one-time, $3.3 million charge to operating expense for the termination of our advisory agreement with Apollo in connection with Metals USA Holdings IPO during the second quarter of 2010. As a percentage of net sales, operating income increased from 5.1% for the nine months ended September 30, 2010 to 7.6% for the nine months ended September 30, 2011.
Interest expense. Interest expense increased $4.7 million, or 17.2%, from $27.4 million for the nine months ended September 30, 2010 to $32.1 million for the nine months ended September 30, 2011. The increase was associated with higher borrowings and a higher average facility rate on the ABL facility. The weighted average outstanding balance on our ABL facility increased from $74.9 million for the nine months ended September 30, 2010 to $207.1 million for the nine months ended September 30, 2011. Borrowings under the ABL facility were used to fund the Trident and ORMS acquisitions, in addition to higher working capital needs between the two periods.
34
Segment ResultsThree Months Ended September 30, 2011 Compared to September 30, 2010
Net Sales |
Operating Costs and Expenses |
Operating Income (Loss) |
Capital Spending |
Tons Shipped(1) |
||||||||||||||||||||
Direct | Toll | |||||||||||||||||||||||
(in millions, except tons) | ||||||||||||||||||||||||
2011: |
||||||||||||||||||||||||
Plates and Shapes |
$ | 191.3 | $ | 171.3 | $ | 20.0 | $ | 1.9 | 139 | 7 | ||||||||||||||
Flat Rolled and Non-Ferrous |
279.7 | 259.1 | 20.6 | 4.5 | 168 | 30 | ||||||||||||||||||
Building Products |
24.7 | 23.8 | 0.9 | | | | ||||||||||||||||||
Corporate and other |
(3.4 | ) | 2.8 | (6.2 | ) | | (3 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 492.3 | $ | 457.0 | $ | 35.3 | $ | 6.4 | 304 | 37 | ||||||||||||||
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|
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|
|
|
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|
|
|
|
|||||||||||||
2010: |
||||||||||||||||||||||||
Plates and Shapes |
$ | 144.4 | $ | 134.7 | $ | 9.7 | $ | 0.5 | 128 | 9 | ||||||||||||||
Flat Rolled and Non-Ferrous |
180.1 | 168.0 | 12.1 | 0.1 | 132 | 6 | ||||||||||||||||||
Building Products |
23.2 | 22.0 | 1.2 | | | | ||||||||||||||||||
Corporate and other |
(2.4 | ) | 1.7 | (4.1 | ) | 0.2 | (2 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 345.3 | $ | 326.4 | $ | 18.9 | $ | 0.8 | 258 | 15 | ||||||||||||||
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|
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|
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|
|
|
|
(1) | Shipments are expressed in thousands of tons and are not an applicable measure for the Building Products Group. |
Plates and Shapes. Net sales increased $46.9 million, or 32.5%, from $144.4 million for the three months ended September 30, 2010 to $191.3 million for the three months ended September 30, 2011. The increase was primarily attributable to a 24.3% increase in average realized prices, in addition to a 6.6% increase in shipments for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Product demand for the Plates and Shapes Group is more transactional in nature and is typically associated with industries and end markets that show strength during later stages of economic cycles. While we experienced increased demand from the defense and oilfield services end markets during the third quarter of 2011, the non-residential construction sector, which has been a key metal consuming end market for us in the past, continued to experience weak demand by historical standards.
Increases in demand for both structural steel and steel scrap led to increases in the producer price of structural steel during the first nine months of 2011. Currently, structural steel remains readily available in the U.S. market, with service centers holding approximately two to three months of inventory on hand. Mill delivery lead times are relatively short with lower seasonal demand expected for the remainder of the year.
Operating costs and expenses increased $36.6 million, or 27.2%, from $134.7 million for the three months ended September 30, 2010 to $171.3 million for the three months ended September 30, 2011. The increase was primarily attributable to a 21.2% increase in average cost per ton, in addition to a 6.6% increase in shipments for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Operating costs and expenses as a percentage of net sales decreased from 93.3% for the three months ended September 30, 2010 to 89.5% for the three months ended September 30, 2011.
Operating income increased $10.3 million, or 106.2%, from $9.7 million for the three months ended September 30, 2010 to $20.0 million for the three months ended September 30, 2011. The increase primarily resulted from the increase in net sales discussed above, in addition to lower operating costs and expenses as a percentage of net sales as we continue to focus on controlling our operating costs in order to maintain our margins. Operating income as a percentage of net sales increased from 6.7% for the three months ended September 30, 2010 to 10.5% for the three months ended September 30, 2011.
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Flat Rolled and Non-Ferrous. Net sales increased $99.6 million, or 55.3%, from $180.1 million for the three months ended September 30, 2010 to $279.7 million for the three months ended September 30, 2011. Trident and ORMS contributed a combined $54.3 million of incremental sales for the quarter ended September 30, 2011. The remaining increase was primarily attributable to a 17.4% increase in shipments, in addition to a 6.6% increase in average realized prices for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Our recent acquisitions caused shipments during the third quarter of 2011 to include a larger proportion of toll processed tonnage than our historical norm. Toll processing describes performing processing services on customer-owned material. Net sales for toll processing equates to the processing service fee charged to the customer. Sales of non-ferrous metals accounted for approximately 41% of the segments sales product mix for the third quarter of 2011, compared to approximately 37% for the third quarter of 2010. The significant growth in volume for our Flat Rolled and Non-Ferrous Group is attributable to solid demand in selected end-user markets during the third quarter of 2011, including energy and oilfield services, heavy equipment and automotive industry manufacturers, lawn and garden equipment manufacturers, truck transportation and household appliance manufacturers.
Operating costs and expenses increased $91.1 million, or 54.2%, from $168.0 million for the three months ended September 30, 2010 to $259.1 million for the three months ended September 30, 2011. Trident and ORMS contributed a combined $50.4 million of incremental operating costs and expenses to the segment for the third quarter of 2011. The remaining increase was primarily attributable to a 17.4% increase in shipments, in addition to a 6.9% increase in average cost per ton. Operating costs and expenses as a percentage of net sales decreased from 93.3% for the three months ended September 30, 2010 to 92.6% for the three months ended September 30, 2011.
Operating income increased by $8.5 million, or 70.2%, from $12.1 million for the three months ended September 30, 2010 to $20.6 million for the three months ended September 30, 2011. The increase was primarily attributable to the increase in volumes, combined with the increase in average realized prices discussed above. Trident and ORMS contributed a combined $3.9 million of incremental operating income for the three months ended September 30, 2011. Operating income as a percentage of net sales increased from 6.7% for the three months ended September 30, 2010 to 7.4% for the same period of 2011.
Building Products. Net sales increased $1.5 million, or 6.5%, from $23.2 million for the three months ended September 30, 2010 to $24.7 million for the three months ended September 30, 2011. Although the Building Products segment experienced revenue growth during the third quarter of 2011 compared to the third quarter of 2010, this segment of our business continues to be affected by lower consumer spending on residential remodeling due to the effects of the economic recession. Weak job growth, high unemployment, declining home prices and subdued consumer confidence, in addition to decreased access to affordable credit for homeowners and residential remodeling contractors, have contributed to volatility in home improvement spending.
Operating costs and expenses increased $1.8 million, or 8.2%, from $22.0 million for the three months ended September 30, 2010 to $23.8 million for the three months ended September 30, 2011. Operating costs and expenses as a percentage of net sales increased from 94.8% for the three months ended September 30, 2010 to 96.4% for the three months ended September 30, 2011.
Operating income decreased from $1.2 million for the three months ended September 30, 2010 to $0.9 million for the three months ended September 30, 2011. Operating income as a percentage of net sales was 3.6% for the quarter ended September 30, 2011 versus 5.2% for the quarter ended September 30, 2010.
Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss increased $2.1 million for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 due primarily to higher professional fees and higher expenses associated with incentive compensation as a result of the underlying growth and improved performance of the business.
36
Segment Results Nine Months Ended September 30, 2011 Compared to September 30, 2010
Net Sales |
Operating Costs and Expenses |
Operating Income (Loss) |
Capital Spending |
Tons Shipped(1) |
||||||||||||||||||||
Direct | Toll | |||||||||||||||||||||||
(in millions, except tons) | ||||||||||||||||||||||||
2011: |
||||||||||||||||||||||||
Plates and Shapes |
$ | 588.1 | $ | 521.0 | $ | 67.1 | $ | 4.2 | 435 | 26 | ||||||||||||||
Flat Rolled and Non-Ferrous |
785.7 | 724.9 | 60.8 | 5.6 | 519 | 98 | ||||||||||||||||||
Building Products |
66.1 | 65.8 | 0.3 | 0.1 | | | ||||||||||||||||||
Corporate and other |
(9.7 | ) | 10.0 | (19.7 | ) | 0.2 | (9 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,430.2 | $ | 1,321.7 | $ | 108.5 | $ | 10.1 | 945 | 124 | ||||||||||||||
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|
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|
|
|
|
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2010: |
||||||||||||||||||||||||
Plates and Shapes |
$ | 402.8 | $ | 372.6 | $ | 30.2 | $ | 1.6 | 366 | 14 | ||||||||||||||
Flat Rolled and Non-Ferrous |
509.1 | 472.9 | 36.2 | 0.4 | 396 | 22 | ||||||||||||||||||
Building Products |
63.7 | 63.6 | 0.1 | | | | ||||||||||||||||||
Corporate and other |
(7.4 | ) | 10.1 | (17.5 | ) | 0.2 | (6 | ) | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 968.2 | $ | 919.2 | $ | 49.0 | $ | 2.2 | 756 | 36 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Shipments are expressed in thousands of tons and are not an applicable measure for the Building Products Group. |
Plates and Shapes. Net sales increased $185.3 million, or 46.0%, from $402.8 million for the nine months ended September 30, 2010 to $588.1 million for the nine months ended September 30, 2011. The increase was primarily attributable to a 21.3% increase in shipments, in addition to a 20.3% increase in average realized prices for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. While we experienced increased demand from the defense and energy services end markets during the first nine months of 2011, the non-residential construction sector, which has been a key metal consuming end market for us in the past, continued to experience weak demand by historical standards.
Operating costs and expenses increased $148.4 million, or 39.8%, from $372.6 million for the nine months ended September 30, 2010 to $521.0 million for the nine months ended September 30, 2011. The increase was primarily attributable to a 21.3% increase in shipments, in addition to a 19.2% increase in the average cost per ton for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. We incurred approximately $0.6 million of facility closure and severance expenses related to the closure of a Plates and Shapes location in Hayward, California during the first quarter of 2011, which contributed to the increase in operating costs and expenses versus the prior year. Operating costs and expenses as a percentage of net sales decreased from 92.5% for the nine months ended September 30, 2010 to 88.6% for the nine months ended September 30, 2011.
Operating income increased $36.9 million, or 122.2%, from $30.2 million for the nine months ended September 30, 2010 to $67.1 million for the nine months ended September 30, 2011. The increase primarily resulted from the increase in net sales discussed above, in addition to lower operating costs and expenses as a percentage of net sales, as we continue to focus on cost control. Operating income as a percentage of net sales increased from 7.5% for the nine months ended September 30, 2010 to 11.4% for the nine months ended September 30, 2011.
Flat Rolled and Non-Ferrous. Net sales increased $276.6 million, or 54.3%, from $509.1 million for the nine months ended September 30, 2010 to $785.7 million for the nine months ended September 30, 2011. Trident, ORMS and J. Rubin contributed a combined $140.2 million of incremental sales for the nine months ended September 30, 2011. The remaining increase was primarily attributable to a 16.3% increase in shipments,
37
in addition to a 9.5% increase in average realized prices for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Our recent acquisitions caused shipments during the first nine months of 2011 to include a larger proportion of toll processed tonnage than our historical norm. Toll processing describes performing processing services on customer-owned material. Net sales for toll processing equates to the processing service fee charged to the customer. Sales of non-ferrous metals accounted for approximately 39% of the segments sales product mix for the first nine months of 2011, compared to approximately 38% for the first nine months of 2010. Our Flat Rolled and Non-Ferrous Group experienced increased demand in the automotive, heating and air conditioning equipment, lawn and garden equipment and aerospace equipment markets during the first nine months of 2011.
Operating costs and expenses increased $252.0 million, or 53.3%, from $472.9 million for the nine months ended September 30, 2010 to $724.9 million for the nine months ended September 30, 2011. Trident, ORMS and J. Rubin contributed a combined $131.0 million of incremental operating costs and expenses to the segment for the first nine months of 2011. The remaining increase was primarily attributable to a 16.3% increase in shipments, in addition to a 9.6% increase in average cost per ton. Operating costs and expenses as a percentage of net sales decreased from 92.9% for the nine months ended September 30, 2010 to 92.3% for the nine months ended September 30, 2011.
Operating income increased $24.6 million, or 68.0%, from $36.2 million for the nine months ended September 30, 2010 to $60.8 million for the nine months ended September 30, 2011. The increase was primarily attributable to the increase in volumes, combined with the increase in average realized prices discussed above. Trident, ORMS and J. Rubin contributed a combined $9.2 million of incremental operating income for the nine months ended September 30, 2011. Operating income as a percentage of net sales increased from 7.1% for the nine months ended September 30, 2010 to 7.7% for the same period of 2011.
Building Products. Net sales increased $2.4 million, or 3.8%, from $63.7 million for the nine months ended September 30, 2010 to $66.1 million for the nine months ended September 30, 2011. Although the Building Products segment experienced top-line growth during the first nine months of 2011 compared to the same period of 2010, this segment of our business continues to be affected by lower consumer spending on residential remodeling due to the effects of the economic recession. Weak job growth, high unemployment, declining home prices and subdued consumer confidence, in addition to decreased access to affordable credit for homeowners and residential remodeling contractors, have contributed to volatility in home improvement spending.
Operating costs and expenses increased $2.2 million, or 3.5%, from $63.6 million for the nine months ended September 30, 2010 to $65.8 million for the nine months ended September 30, 2011. Operating costs and expenses as a percentage of net sales decreased from 99.8% for the nine months ended September 30, 2010 to 99.6% for the nine months ended September 30, 2011.
Operating income increased from $0.1 million for the nine months ended September 30, 2010 to $0.3 million for the nine months ended September 30, 2011. Results for the first nine months of 2011 include a non-recurring gain of approximately $0.7 million resulting from a settlement with the previous owners of the Dura-Loc (now Allmet) roofing business we acquired in 2006 to cover pre-acquisition warranty claims.
Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss increased $2.2 million for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 due primarily to higher professional fees and higher expenses associated with incentive compensation as a result of the underlying growth and improved performance of the business.
38
Liquidity and Capital Resources
Our primary sources of short-term liquidity are borrowings under the ABL facility and our cash flow from operations. We believe these resources will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.
Our borrowing availability fluctuates daily with changes in eligible accounts receivable and inventory, less outstanding borrowings and letters of credit. See Financing Activities below. As of September 30, 2011, we had $446.6 million of eligible collateral, $243.4 million in outstanding advances, $25.9 million in open letters of credit and $177.3 million of additional borrowing capacity. As of September 30, 2011, we had $8.3 million of cash on hand.
We generally meet long-term liquidity requirements, the repayment of debt and investment funding needs, through additional borrowings under the ABL facility and the issuance of debt securities. As of September 30, 2011, our debt consisted of $243.4 million of outstanding borrowings under the ABL facility, $226.3 million principal amount of the Metals USA Notes, IRBs with $12.8 million principal amount outstanding, a note payable to Metals USA Holdings in the amount of $47.0 million, and $2.1 million of capital leases and other obligations. We believe that cash flow from operations, supplemented by cash available under the ABL facility, will be sufficient to enable us to meet our debt service and operational obligations as they come due for at least the next twelve months.
With respect to long-term liquidity, we believe that we will be able to meet our working capital, capital expenditure and debt service obligations. Our ability to meet long-term liquidity requirements is subject to obtaining additional debt and/or equity financing. Decisions by lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit agreements, industry and market trends, the availability of capital, and the relative attractiveness of alternative lending or investment opportunities.
Operating and Investing Activities
Although we do not produce any metal, our financial performance is affected by changes in metal prices. When metal prices rise, the prices at which we are able to sell our products generally increase over their historical costs; accordingly, our working capital (which consists primarily of accounts receivable and inventory) tends to increase. Conversely, when metal prices fall, our working capital tends to decrease. Our working capital (current assets less current liabilities) increased from $368.2 million at December 31, 2010 to $495.1 million at September 30, 2011.
Changes in metal prices also affect our liquidity because of the time difference between our payment for our raw materials and our collection of cash from our customers. We sell our products and typically collect our accounts receivable within 45 days after the sale; however, we tend to pay for replacement materials (which are more expensive when metal prices are rising) over a much shorter period, primarily to benefit from early-payment discounts that are substantially higher than our cost of incremental debt. As a result, when metal prices are rising, we tend to draw more on the ABL facility to cover the cash flow cycle from material purchase to cash collection. When metal prices fall, we can replace our inventory at lower cost and, thus, generally do not need to access the ABL facility as much to cover the cash flow cycle. We believe that cash flow from operations, supplemented by cash available under the ABL facility, will be sufficient to enable us to meet our debt service and operational obligations as they come due for at least the next twelve months. Additionally, we intend to look for value-added businesses that we can acquire at reasonable prices. We intend to use cash flows from operations and excess cash available under the ABL facility to fund future acquisitions.
The following discussion of the principal sources and uses of cash should be read in conjunction with our condensed consolidated statements of cash flows included in our condensed consolidated financial statements for the nine months ended September 30, 2011.
39
During the nine months ended September 30, 2011, net cash used in operating activities was $42.3 million. During the first nine months of 2011, our working capital increased as we experienced increasing prices and end market demand. Increases of $70.9 million in our accounts receivable balance and $74.8 million in our inventory value were the primary contributors to operating cash outflows for the period. Accounts receivable increased due to stronger sales which were primarily driven by sharply higher shipments versus the same period of the prior year. During the nine months ended September 30, 2010, net cash used in operating activities was $20.9 million. During the first nine months of 2010, our working capital increased as we experienced modestly increasing prices and slowly recovering end market demand. Increases of $39.5 million in our accounts receivable balance and $43.2 million in our inventory value were the primary contributors to operating cash outflows for the period.
Net cash used in investing activities was $98.0 million for the nine months ended September 30, 2011, and consisted primarily of $88.1 million of acquisition costs, net of cash acquired, for the Trident acquisition, which closed on March 11, 2011, and capital expenditures of $10.1 million. Net cash used in investing activities was $21.0 million for the nine months ended September 30, 2010, and consisted primarily of capital expenditures of $2.2 million and $19.0 million of cash paid for the J. Rubin acquisition, which closed in June 2010.
Net cash provided by financing activities was $133.4 million for the nine months ended September 30, 2011, which consisted of net borrowings on the ABL facility of $137.4 million offset by $2.9 million of cash paid for loan financing costs and $1.1 million of debt repayments. Net cash provided by financing activities was $47.5 million for the nine months ended September 30, 2010, and consisted primarily of net borrowings on the intercompany loan facility of $47.0 million.
Covenant Compliance
Adjusted EBITDA
Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility and the Indenture governing the Metals USA Notes) is defined as EBITDA further adjusted to exclude certain non-cash and non-recurring items. Adjusted EBITDA is not a defined term under GAAP and should not be used as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity.
Fixed Charge Coverage Ratio
Under the ABL facility, the FCCR is determined on a rolling four-quarter period, often referred to as a last-twelve month period, by dividing (1) the Adjusted EBITDA of Metals USA minus income taxes paid in cash minus non-financed capital expenditures by (2) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt paid by Metals USA. Should borrowing availability under the ABL facility fall below Minimum Availability, we must maintain a FCCR of at least 1.0 to 1.0, measured on a trailing four-quarter basis. As of September 30, 2011, our borrowing availability under the ABL facility was $177.3 million. In addition, the FCCR is an important measure of our liquidity and affects our ability to take certain actions, including paying dividends to stockholders and making acquisitions.
Because access to debt capital is currently and in the future will continue to be important to us, we believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with the covenants in our debt agreements. Failure to comply with the FCCR covenant of the ABL facility can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions. As of September 30, 2011, our FCCR was 2.78. As of September 30, 2011, we had $177.3 million of additional borrowing capacity under the ABL facility.
Although the Indenture governing the Metals USA Notes also contains covenants that restrict our ability to incur indebtedness and pay dividends based on our FCCR, the definition and application of the FCCR contained in the Indenture differs from the definition and application of the FCCR in the ABL facility in that the numerator
40
of the FCCR as defined in the Indenture does not include cash income taxes or non-financed capital expenditures and the denominator of the FCCR as defined in the Indenture does not include the sum of certain distributions paid in cash and scheduled principal reductions on debt, and separate FCCRs are required under certain circumstances. See Financing Activities below.
The Indenture governing the Metals USA Notes contains covenants that restrict our ability to take certain actions, such as incurring additional debt and making certain acquisitions, if we are unable to meet defined Adjusted EBITDA to fixed charge coverage ratios (as defined). The covenants in the Indenture require us to have an Adjusted EBITDA to fixed charge coverage ratio (measured on a trailing four-quarter basis and calculated differently from the fixed charge coverage ratio as defined by the ABL facility) of 2.0 to 1.0 to incur ratio indebtedness. Based on the calculations for the trailing four quarters, we are able to satisfy these covenants and incur additional indebtedness under these ratios, including for acquisition purposes, under our Indenture.
Pro Forma Adjusted EBITDA
Pro Forma Adjusted EBITDA is defined as Adjusted EBITDA (as discussed above) with additions for the Adjusted EBITDA of recent acquisitions as though we owned those businesses for the twelve-month period ended September 30, 2011. Adjusted EBITDA on a Pro Forma Basis, as defined in our debt agreements, is a non-GAAP measure used in the calculation of our Consolidated Total Debt Ratio, as defined by the Indenture governing the Metals USA Notes. As of September 30, 2011, our Consolidated Total Debt Ratio was 3.56 based on a trailing twelve-month Pro Forma Adjusted EBITDA of $149.3 million.
Our inability to satisfy the terms of the negative covenants in our debt agreements do not, by themselves, constitute covenant violations or events of default. Rather, they are event-related restrictions that may limit or prohibit the Company from taking certain corporate actions. As of September 30, 2011, we were not restricted under any of the negative covenants in our debt agreements.
Limitations of Adjusted EBITDA
There are material limitations associated with making the adjustments to our earnings to calculate Adjusted EBITDA and using such a non-GAAP financial measure as compared to the most directly comparable GAAP financial measure. For instance, Adjusted EBITDA does not include:
| interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue; |
| income tax expense, and because the payment of taxes is part of our operations, income tax expense is a necessary element of our costs and ability to operate; and |
| depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue. |
In addition, fixed charges should not be considered an alternative to interest expense.
41
Below is a reconciliation of net income to EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, and net cash used in operating activities:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Twelve Months
Ended September 30, |
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2011 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
Net income |
$ | 16.0 | $ | 5.0 | $ | 47.9 | $ | 11.7 | $ | 51.1 | ||||||||||
Depreciation and amortization(1) |
5.5 | 4.9 | 16.9 | 14.9 | 21.8 | |||||||||||||||
Interest expense |
10.4 | 9.5 | 32.1 | 27.4 | 41.9 | |||||||||||||||
Provision for income taxes |
8.8 | 4.4 | 28.4 | 9.9 | 26.7 | |||||||||||||||
Other expense |
0.1 | | 0.1 | | 0.1 | |||||||||||||||
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EBITDA |
40.8 | 23.8 | 125.4 | 63.9 | 141.6 | |||||||||||||||
Covenant defined adjustments: |
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Facilities closure and severance costs(2) |
| | 0.6 | | 0.6 | |||||||||||||||
Stock options and grant expense(3) |
0.4 | 0.5 | 1.2 | 0.7 | 1.7 | |||||||||||||||
Advisory agreement fees(4) |
| | | 3.6 | 0.2 | |||||||||||||||
Acquisition expenses(5) |
0.1 | | 1.5 | | 1.5 | |||||||||||||||
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Adjusted EBITDA(6) |
41.3 | 24.3 |