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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 1-13123
METALS USA, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction 76-0533626
of incorporation or organization) (I.R.S. Employer
Identification Number)
Three Riverway, Suite 600
Houston, Texas 77056
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 965-0990
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
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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 |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Based upon the March 15, 2001 New York Stock Exchange closing price of
$3.02 per share, the aggregate market value of the Registrant's outstanding
stock held by non-affiliates was approximately $88.9 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's definitive proxy statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the close of the Registrant's fiscal year, are incorporated
by reference under Part III.
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This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places,
including Item 1. "Business," Item 3. "Legal Proceedings" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory requirements
and changing prices and market conditions. This report identifies other factors
that could cause such differences. No assurance can be given that these are all
of the factors that could cause actual results to vary materially from the
forward-looking statements.
i
METALS USA, INC.
PART I
Item 1. Business
General
Metals USA, Inc. ("Metals USA") completed its initial public offering on
July 11, 1997. Metals USA acquired, in exchange for cash and shares of its $.01
par value common stock, eight companies. Since that date, Metals USA has
acquired numerous additional metal processing and distribution companies and
businesses. The Company is engaged in the value-added processing and
distribution of steel, aluminum and specialty metals, as well as manufacturing
metal components. The acquired companies, on average, have been in business for
over 40 years. Unless otherwise indicated, all references to the "Company"
herein include the acquired companies and other entities wholly-owned by Metals
USA, and references herein to "Metals USA" mean Metals USA, Inc.
The Company purchases metal from primary producers who generally focus on
large volume sales of unprocessed metals in standard configurations and sizes.
In most cases, the Company performs the customized, value-added processing
services required to meet specifications provided by end-use customers. By
providing these services, as well as offering inventory management and
just-in-time delivery services, the Company enables its customers to reduce
material costs, decrease capital required for raw materials inventory and
processing equipment and save time, labor, warehouse space and other expenses.
The Company believes that fostering the development of long-term working
relationships with key suppliers and customers enables it to reduce its
customers' overall cost of manufactured metal products. In addition to its
metals processing capabilities, the Company manufactures higher-value finished
building products.
The Company sells to over 65,000 customers in businesses such as the
machining, furniture, transportation equipment, power and process equipment,
industrial/commercial construction, consumer durables and electrical equipment
industries, and machinery and equipment manufacturers. The Company's broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduces its susceptibility to economic fluctuations affecting any one industry
or geographical area.
Industry Overview
Companies operating in the metals industry can be generally characterized
as: (i) primary metals producers, (ii) metals processors/service centers or
(iii) end-users. The Company believes that both primary metals producers and
end-users are increasingly seeking to have their metals processing and inventory
management requirements met by value-added metals processors/service centers.
Primary metals producers, which manufacture and sell large volumes of steel,
aluminum and specialty metals in standard sizes and configurations, generally
sell only to those large end-users and metals processors/service centers who do
not require processing of the products and who can tolerate relatively long lead
times. Metals processors/service centers offer services ranging from precision,
value-added preproduction processing in accordance with specific customer
demands, to storage and distribution of unprocessed metal products. These
service centers function as intermediaries between primary metals producers and
end-users, such as contractors and original equipment manufacturers ("OEMs").
End-users incorporate the processed metal into a product, in some cases without
further modification.
Historically, metals service centers provided few value-added services and
were little more than distribution centers, linking metals producers with all
but the largest end-users of metals. In the past two decades, however, the
metals service center business has evolved significantly, and the most
successful metals service centers have added processing capabilities, thereby
offering an increasingly broad range of value-added services and products both
to primary metals producers and end-users. This evolution has resulted from
changing trends in the primary metals industry as well as among end-users.
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METALS USA, INC.
Item 1. Business (Continued)
The current trend among primary metals producers is to focus on their core
competency of high-volume production of a limited number of standardized metal
products. This change in focus has been driven by metal producers' need to
develop and improve efficient, volume-driven production techniques in order to
remain competitive. As a result, during the past two decades, most of the
primary producers have sold their service centers. Accordingly, most end-users
are no longer able to obtain processed products directly from primary metals
producers and have recognized the economic advantages associated with
outsourcing their customized metals processing and inventory management
requirements. Outsourcing permits end-users to reduce total production cost by
shifting the responsibility for preproduction processing to value-added metals
processors/service centers, whose higher efficiencies in performing these
processing services make the ownership and operation of the necessary equipment
more financially feasible.
Value-added metals processors/service centers have also benefited from
growing customer demand for inventory management and just-in-time delivery
services. These supply-chain services, which are not normally available from
primary metals producers, enable end-users to reduce material costs, decrease
capital required for inventory and equipment and save time, labor and other
expenses. In response to customer expectations, the more sophisticated
value-added metals processors/service centers have acquired specialized and
expensive equipment to perform customized processing and have installed
sophisticated computer systems to automate order entry, inventory tracking,
management sourcing and work-order scheduling. Additionally, some value-added
metals processors/service centers have installed electronic data interchange
("EDI") between their computer systems and those of their customers to
facilitate order entry, timely delivery and billing.
These trends have resulted in value-added metals processors/service
centers playing an increasingly important role in all segments of the metals
industry. Metals processors/service centers now serve the needs of over 300,000
OEMs and fabricators nationwide.
Company Organization
During 1998, the Company organized into four product groups: Plates and
Shapes, Flat Rolled, Specialty Metals and Building Products. In early 2001, the
Company announced a change in the organization to improve operational
efficiencies and reduce administrative costs, which resulted in a reduction in
the number of product groups to three. The Flat Rolled Group will expand to
include all flat rolled processing operations of specialty metals and carbon
steel in a single business unit. Similarly, the non-flat rolled operations of
the former Specialty Metals Group will be included in an expanded Plates and
Shapes Group. This new structure will provide opportunities for increased
efficiency and cost savings as well as improved customer service. Each group is
led by an experienced entrepreneurial-focused executive, who is supported by a
professional staff in finance, purchasing and sales and marketing. This
product-oriented organizational structure facilitates the efficient advancement
of the Company's goals and objectives to achieve operational synergies, focused
capital investment and improved working capital turnover. The following
descriptions reflect the reorganization of the product groups.
Plates and Shapes
Plates and Shapes has current annualized revenues of approximately $965
million and 52 locations throughout the United States. This operating segment
sells carbon steel products such as wide-flange beams, plate, tubular, angles
and other structural shapes as well as many specialty metals products including
stainless steel, ductile iron, brass, copper, aluminum, magnesium and titanium.
These products are available in a number of alloy grades and sizes and generally
undergo additional processing prior to customer delivery. Processing services
include cutting, sawing, cambering/leveling, punching, drilling, beveling,
surface grinding, bending, shearing, cut-to-length and T-splitting. Plates and
Shapes sells to over 43,000 individual customers in a
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METALS USA, INC.
Item 1. Business (Continued)
number of industries predominantly in the fabrication, construction, machinery
and equipment, transportation, aerospace, electronics and energy industries.
Flat Rolled
Flat Rolled has current annualized revenues of approximately $937 million
and 29 locations in the mid-west, south and southwest regions of the United
States. This operating segment sells a number of products including carbon
steel, stainless, aluminum, brass and copper in a variety of alloy grades and
sizes. Steel mills generally ship carbon steel in sizes less than a quarter of
an inch in thickness in continuous coils that typically weigh forty to fifty
thousand pounds each. Few customers can handle steel in this form. Accordingly,
substantially all of the carbon steel material as well as the nonferrous
materials sold by Flat Rolled undergo additional processing prior to customer
delivery. Processing services include slitting, precision blanking, leveling,
cut-to-length, laser cutting, punching, bending and shearing.
Flat Rolled sells to over 10,000 individual customers in a variety of
industries, predominantly in the electrical manufacturing, fabrication,
furniture, appliance manufacturers, machinery and equipment and transportation
industries.
Building Products
Building Products has current annualized revenues of approximately $170
million and 63 locations throughout the southeast, southwest and western regions
of the United States. This operating segment sells a number of finished products
that are both cost and energy efficient for use in residential applications such
as sunrooms, roofing products, awnings and solariums. Commercial uses of these
products include large area covered canopies, awnings and covered walkways.
Building Products sells to over 14,000 individual customers predominantly in
construction, wholesale trade and building material industries.
For additional industry segment information, see Note 11 of Notes to
Consolidated Financial Statements in Item 8. "Financial Statements and
Supplementary Data."
Industry Consolidation
Based on industry data, the Company believes that the metals
processor/service center industry is highly fragmented, with as many as 3,500
participants. According to industry data, the metals processor/service center
industry generates over $75 billion in annual net sales.
The necessity for value-added metals processors/service centers to add
specialized processing equipment, manage inventory on behalf of their customers
and use sophisticated computer systems is requiring industry participants to
make substantial capital investments in order to remain competitive. In
addition, many customers are seeking to reduce their operating costs by limiting
the number of suppliers with whom they do business, often eliminating those
suppliers offering limited ranges of products and services. These trends have
placed the substantial number of small, owner-operated businesses at a
competitive disadvantage because they have limited access to the capital
resources necessary to increase their capabilities, or they can not economically
justify the investment in equipment. As a result, smaller companies are finding
it increasingly difficult to compete as present industry trends continue, and
the Company believes these businesses represent potential acquisition
candidates.
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METALS USA, INC.
Item 1. Business (Continued)
Strategy
The Company's objective is to become the leading national value-added
metals processor/service center, to manufacture higher-value components from
processed metals. The principal components of the Company's growth plan are to
improve operating margins and accelerate internal sales growth. Management plans
to achieve these objectives as described in the following paragraphs.
Improving Operating Margins
The Company believes there are significant opportunities to realize
operating efficiencies and increase the Company's profitability. The key
components of this strategy are:
Increase Operating Efficiencies. The Company believes that its position in
the industry presents significant opportunities to achieve operating
efficiencies and cost savings. The Company intends to use its increased
purchasing power to gain volume discounts and to develop more effective
inventory management systems. The Company expects to obtain measurable cost
savings in such areas as vehicle leasing and maintenance, information systems
and purchasing through contractual relationships with key suppliers. Moreover,
the Company continues to review its operating and training programs at the local
and regional levels to identify those "best practices" that can be successfully
implemented throughout its operations. As primary metals producers and end-users
continue to follow the industry trend of outsourcing processing and distribution
services to value-added metals processors/services centers, the Company expects
to increase asset utilization, particularly of its metals processing machinery,
and realize increased efficiencies and economies of scale.
Control Overhead Costs. The Company has undertaken several administrative
moves as part of an ongoing effort to control overhead costs. These include
standardization and consistency in information systems, procurement processes,
and employee benefit programs. Additionally, arrangements with suppliers are
being developed that will also help reduce costs.
Accelerating Internal Sales Growth
A key component of the Company's strategy is to accelerate internal sales
growth at each processor/service center. The key elements of this internal
growth strategy are:
Expand Products and Services to Existing Customers. The Company believes
it will be able to expand the products and services it offers to its existing
customers by leveraging the specialized and diverse product, processing and
marketing expertise among the existing processor/service centers. Additionally,
the Company believes that there are significant opportunities to accelerate
internal growth by making capital investments in areas such as inventory
management, logistics systems and processing equipment, thereby expanding the
range of processes and services offered by the Company. The Company continues to
develop and maintain long-term relationships with its customers in response to
their demand for shorter production cycles, outsourcing, just-in-time delivery
and other services that lower customers' total production costs.
Add New Customers. The Company believes that there are numerous OEMs not
currently served by the Company that could reduce their production costs by
taking advantage of the Company's processing, inventory management and other
services. Many of these OEMs currently perform in-house metals processing tasks
and maintain significant inventories of metal. The Company believes that it can
demonstrate to these OEMs the cost savings achievable through the use of the
Company's processing, inventory management and other
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METALS USA, INC.
Item 1. Business (Continued)
services.
The Company also has implemented a Company-wide marketing program that
will use professional marketing services and adopt "best practices" throughout
its operations to identify, obtain and maintain new customers. In addition, the
Company intends to increase its visibility through trade shows, trade
associations, publications and telemarketing.
Processing Services and Products
The Company engages in preproduction processing of steel, aluminum and
specialty metals and acts as an intermediary between primary metals producers
and end-users. The Company purchases metals from primary producers, maintains an
inventory of various metals to allow rapid fulfillment of customer orders and
performs customized processing services to the specifications provided by
end-users and other customers. By providing these services, as well as offering
inventory management and just-in-time delivery services, the Company enables its
customers to reduce overall production costs and decrease capital required for
raw materials inventory and metals processing equipment.
The Company buys steel and aluminum from integrated mills and mini-mills
and certain specialty metals from foundries. The Company purchases its raw
materials in anticipation of projected customer requirements based on
interaction with, and feedback from customers, market conditions, historical
usage and industry research. Primary producers typically find it more cost
effective to focus on large volume production and sale of steel, aluminum and
specialty metals in standard sizes and configurations to large volume
purchasers. For example, flat rolled steel is normally sold by mills in coils,
typically weighing between forty and fifty thousand pounds. The Company
processes the metals to the precise thickness, length, width, shape, temper and
surface quality specified by its customers. Value-added processes provided by
the Company include:
o Slitting-- the cutting of coiled metals to specified widths along
the length of the coil.
o Shearing and cutting to length-- the cutting of metals into pieces
and along the width of a coil to create sheets or plates.
o Precision blanking-- the process in which flat rolled metal is cut
into precise two-dimensional shapes.
o Laser, flame and plasma cutting-- the cutting of metals to produce
various shapes according to customer-supplied drawings.
o Leveling -- the flattening of metals to uniform tolerances for
proper machining.
o Sawing -- the cutting to length of bars, tubular goods and beams.
o Pickling-- a chemical treatment to improve surface quality by
removing the oxidation and scale which develops on the metal shortly
after it is hot-rolled.
o Tee-splitting-- the splitting of metal beams.
o Plate forming and rolling-- the forming and bending of plates to
cylindrical or required specifications.
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METALS USA, INC.
Item 1. Business (Continued)
o Edge trimming-- a process that removes a specified portion of the
outside edges of coiled metal to produce uniform width and round or
smooth edges.
o Cambering -- the bending of structural steel to improve load-bearing
capabilities.
o Metallurgy-- the analysis and testing of the physical and chemical
composition of metals.
Additional capabilities of the Company include applications engineering
and a variety of other value-added processes such as blasting, painting and
custom machining. Using these capabilities, the Company uses processed metals to
manufacture higher-value components, such as finished building products, and
machines specialty metals into such items as bushings, pump parts and hydraulic
cylinder parts.
Once an order is received, the appropriate inventory is selected and
scheduled for processing in accordance with the customer's requirements and
specified delivery date. Orders are monitored by the Company's computer systems,
including, in certain locations, the use of bar coding to aid in and reduce the
cost of tracking material. The Company's computer systems record the source of
all metal shipped to customers. This enables the Company to identify the source
of any metal which may later be shown to not meet industry standards or that
fails during or after manufacture. This capability is important to the Company's
customers as it allows them to assign responsibility for non-conforming or
defective metal to the mill or foundry that produced the metal. Many of the
products and services provided by the Company can be ordered and tracked through
a web-based electronic network that directly connects the Company's computer
system to those of its customers.
A majority of the Company's orders are filled within 24-48 hours. This is
accomplished through the Company's special inventory management programs, which
permit the Company to deliver processed metals in accordance with the
just-in-time inventory programs of its customers. The Company is required to
carry sufficient inventory of raw materials to meet the short lead time and
just-in-time delivery requirements of its customers.
While the Company ships products throughout the United States, most of its
customers are located within a 250-mile radius of the Company's facilities, thus
enabling an efficient delivery system capable of handling a large number of
short lead-time orders. The Company transports most of its products directly to
its customers either with its own trucks for short-distance and/or multi-stop
deliveries or through common or contract trucking companies.
The Company has quality control systems to ensure product quality and
traceability throughout processing. Quality controls include periodic supplier
audits, customer approved quality standards, inspection criteria and metals
source traceability. Of the Company's facilities, 22 have International
Standards Organization ("ISO") 9002 certification, while all others are actively
working on their certification. Management believes that the Company's emphasis
on quality assurance is a distinct competitive advantage and is increasingly
important to customers seeking to establish relationships with their key
suppliers.
Sources of Supply
In recent years, steel, aluminum, copper and other metals production in
the United States has fluctuated from period to period as mills attempt to match
production to projected demand. Periodically, this has resulted in shortages of,
or increased ordering lead times for, some products, as well as fluctuations in
price. Typically, metals producers announce price changes with sufficient
advance notice to allow the Company to order additional products prior to the
effective date of a price increase, or to defer purchases until a price decrease
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METALS USA, INC.
Item 1. Business (Continued)
becomes effective. The Company's purchasing decisions are based on its forecast
of the availability of metal products, ordering lead times and pricing, as well
as its prediction of customer demand for specific products.
The Company purchases steel, aluminum and other metals from domestic and
foreign integrated mills and mini-mills and specialty metals from foundries. The
Company's domestic steel suppliers include Nucor Corp., LTV Steel Co., Bethlehem
Steel Corp., National Steel Corp., Bayou Steel, AmeriSteel, Chaparral Steel and
Ipsco Steel. Although most forms of steel and aluminum produced by mills can be
obtained from a number of integrated mills or mini-mills, both domestically and
internationally, there are a few products that are available from only a limited
number of producers. Since most metals are shipped F.O.B., the mill and the
transportation of metals is a significant cost factor. The Company seeks to
purchase metals to the extent possible, from the nearest mill, but will use a
more distant mill when it offers a lower delivered price. The Company believes
that it can purchase raw materials in sufficient quantities to permit it to
realize purchasing economies and discounts from its suppliers. The Company
believes it is not materially dependent on any one of its suppliers for raw
materials and that its relationships with its suppliers are good.
Sales and Marketing; Customers
The Company believes that its commitment to consistent quality, service
and just-in-time delivery has enabled it to develop and maintain long-term
relationships with existing customers, while expanding its market penetration
through the use of its sales and marketing program. The Company's sales and
marketing program focuses on the identification of OEMs and other metals
end-users that could achieve significant cost savings through the use of the
Company's inventory management, processing, just-in-time delivery and other
services. The Company uses a variety of methods to identify potential customers,
including the use of databases, telemarketing, direct mail and participation in
manufacturers' trade shows. Customer referrals and the knowledge of the
Company's sales force about regional end-users also result in the identification
of potential customers. Once a potential customer is identified, the Company's
"outside" salespeople assume responsibility for visiting the appropriate
contact, typically the purchasing manager or manager of operations. The
Company's salesperson seeks to explain the potential cost savings achievable
through the Company's services and the Company's commitment to service and
quality.
The Company employs a sales force consisting of "inside" and "outside"
salespeople. "Inside" salespeople are primarily responsible for maintaining
customer relationships, receiving and soliciting individual orders and
responding to service and other inquiries by customers. Increasingly, these
"inside" salespeople have been given responsibility for telemarketing to
potential customers. The Company's "outside" sales force is primarily
responsible for identifying potential customers and calling on them to explain
the Company's services. The sales force is trained and knowledgeable about the
characteristics and applications of various metals, as well as the manufacturing
methods employed by the Company's customers. The Company believes that its high
level of interaction with its customers provides it with meaningful feedback and
information about sales opportunities.
Nearly all sales by the Company are on a negotiated price basis. In some
cases, sales are the result of a competitive bid process where a customer sends
the Company and several competitors a list of products required and the Company
submits a bid on each product.
The Company has a diverse customer base of more than 65,000 customers,
with no single customer accounting for more than 1% of the Company's revenues in
2000. The Company believes that its long-term relationships with many of its
customers contribute significantly to its success.
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METALS USA, INC.
Item 1. Business (Continued)
Competition
The Company is engaged in a highly fragmented and competitive industry.
Competition is based on price, product quality, service, and timeliness of
delivery and geographic proximity. The Company competes with a large number of
other metals processors/service centers on a regional and local basis, some of
which may have greater financial resources than the Company, and several of
which are publicly-held companies. The Company also competes to a lesser extent
with primary metals producers, who typically sell directly to only very large
customers requiring regular shipments of large volumes of metals. The Company
may also face competition for acquisition candidates from these publicly-held
companies, most of whom have acquired a number of metals service center
businesses during the past decade. Other smaller metals processors/service
centers may also seek acquisitions from time to time.
The Company believes that it will be able to compete effectively because
of its significant number of locations, geographic dispersion, knowledgeable and
trained sales force, integrated computer systems, modern equipment, broad-based
inventory, combined purchasing volume and operational economies of scale. The
Company seeks to differentiate itself from its competition in terms of service
and quality by investing in systems and equipment, training and offering a broad
range of products and services, as well as through its entrepreneurial culture
and decentralized operating structure.
In March of 2000, the Company formed a new subsidiary, i-Solutions Direct,
Inc. ("i-Solutions") to develop the Company's integrated supply services and
web-based e-commerce initiative. i-Solutions has created a web-based supply
system to support a Department of Defense contract using technology from Oracle
Corp. and is now engaged in developing and implementing an internet-based supply
chain solution for private sector companies. The Company's experience gained
from having successfully implemented the Department of Defense contract has
facilitated the development of a system for its customers which reduces costs
and errors in metal procurement activities and will permit them to move closer
to a true "just-in-time" inventory management program.
During the past two years, the Company has recognized the development of a
number of different metal supply related e-commerce initiatives. Although the
Company has not joined any of these third party initiatives, it is actively
involved in its own e-commerce initiative and continues to evaluate the
business-to-business internet marketplace for both raw materials and value-added
metals processing services. While the Company believes that its e-commerce
initiatives will ultimately build stronger customer relationships, the Company
is unable to predict the future impact of web-based e-commerce on its results of
operations or financial position.
Government Regulation and Environmental Matters
The Company's operations are subject to a number of federal, state and
local regulations relating to the protection of the environment and to workplace
health and safety. In particular, the Company's operations are subject to
extensive federal, state and local laws and regulations governing waste
disposal, air and water emissions, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other matters.
Hazardous materials the Company uses in its operations include lubricants,
cleaning solvents and sulfuric acid (used in pickling operations at two of its
facilities).
The Company's management believes that the Company is in substantial
compliance with all such laws and does not currently anticipate that the Company
will be required to expend any substantial amounts in the foreseeable future in
order to meet current environmental or workplace health and safety requirements.
However, some of the properties owned or leased by the Company are located in
areas with a history of heavy
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METALS USA, INC.
Item 1. Business (Continued)
industrial use, of which are on or near sites listed on the CERCLA National
Priority List. The Company has a number of leased properties located in or near
industrial or light industrial use areas; and accordingly, these properties may
have been contaminated by pollutants which would have migrated from neighboring
facilities or have been deposited by prior occupants. Furthermore, the Company
is not aware of any notices from authoritative agencies with respect to
clean-up/remediation claims for contamination at the leased properties. However,
there can be no assurance that the Company will not be notified of such claims
with respect to its existing leased or owned properties in the future.
Prior to entering into any agreements with acquisition targets, the
Company evaluates the properties owned or leased by the target and engages an
independent environmental consulting firm to conduct or review assessments of
environmental conditions at each property. Although no environmental claims have
been made against the Company and it has not been named as a potentially
responsible party by the Environmental Protection Agency or any other party, it
is possible that the Company could be identified by the Environmental Protection
Agency, a state agency or one or more third parties as a potentially responsible
party under CERCLA or under analogous state laws. If so, the Company could incur
substantial litigation costs to prove that it is not responsible for the
environmental damage. The Company has obtained limited indemnities from the
former stockholders of the acquired companies whose facilities are located at or
near contaminated sites. The Company believes that these indemnities will be
adequate to protect it from a material adverse effect on its consolidated
financial condition, results of operations or liquidity, should the Company be
held responsible for a share of any clean-up costs. The limited indemnities are
subject to certain deductible amounts, however, and there can be no assurance
that these limited indemnities will fully protect the Company.
Management Information Systems
During 1998, the Company initiated a plan to reduce the disparity between
the management information systems used by its subsidiaries, as historically the
subsidiary companies had used a number of different systems. The principal
system chosen for the Company's Plates and Shapes and Flat Rolled service
centers is "Stelplan" which is a product marketed and distributed by Invera,
Inc. Stelplan is a completely integrated system designed specifically for the
service center industry. By year-end 2001, the majority of the Company's Plates
and Shapes and Flat Rolled service centers will be operating on the Stelplan
platform. The Company has recently begun a similar common platform initiative in
the Building Products Group as well. Nine of the Company's subsidiaries
currently use EDI through which they offer customers a paperless process with
respect to order entry, shipment tracking, billing, remittance processing and
other routine activities. Additionally, several of the subsidiaries also use
computer aided drafting systems to directly interface with computer controlled
(CNC) metal processing equipment, resulting in more efficient use of material
and time.
The Company believes the investment in uniform management information
systems and computer aided manufacturing technology will permit management to
respond quickly and proactively to our customers' needs and service
expectations. These systems are able to share data regarding inventory status,
order backlog, and other critical operational information on a real-time basis.
Employees
The Company employs approximately 4,700 persons. As of December 31, 2000,
approximately 600 employees at 19 sites were members of one of six unions: the
United Steelworkers of America; the International Association of Bridge,
Structural, and Ornamental Ironworkers of America; the International
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METALS USA, INC.
Item 1. Business (Continued)
Brotherhood of Teamsters; Local 40 of the Glass, Molders, Pottery, Plastic &
Allied Workers International Union; United Auto Workers; and the International
Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and
Helpers. The Company's relationship with these unions generally has been
satisfactory, but occasional work stoppages have occurred. Within the last five
years, one work stoppage occurred at one facility, which involved 26 employees
and lasted two days. The Company is currently a party to 18 collective
bargaining agreements, which expire at various times. Collective bargaining
agreements expiring in 2001, 2002, 2003 and 2004 cover 188, 346, 45, and 24
employees, respectively. Historically, the Company has succeeded in negotiating
new collective bargaining agreements without a strike.
From time to time, there are shortages of qualified operators of metals
processing equipment. In addition, during periods of high unemployment, turnover
among less skilled workers can be relatively high. The Company believes that its
relations with its employees are good.
Vehicles
The Company operates a fleet of owned or leased trucks and trailers, as
well as forklifts and support vehicles. It believes these vehicles generally are
well maintained and adequate for the Company's current operations. The Company
expects it will be able to purchase or lease vehicles at lower prices due to its
combined purchasing and leasing volume.
Risk Management, Insurance and Litigation
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company maintains general
liability insurance and liability insurance for bodily injury and property
damage and workers' compensation coverage, which it considers sufficient to
insure against these risks.
From time to time, the Company is a party to litigation arising in the
ordinary course of its business, most of which involves claims for personal
injury or property damage incurred in connection with its operations. The
Company is not currently involved in any litigation that it believes will have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
Safety
The Company's goal is to provide an accident-free workplace and is
committed to continuing and improving upon each facilities' focus and emphasis
on safety in the workplace. The Company currently has a number of safety
programs in place, which include regular weekly or monthly field safety
meetings, bonuses based on an employee's or a team's safety record and training
sessions to teach proper safe work procedures. The Company is actively
developing a comprehensive "best practices" safety program to be implemented
throughout its operations to ensure that all employees comply with safety
standards established by the Company, its insurance carriers and federal, state
and local laws and regulations. This program is being led by a professional
safety manager at the Corporate office, with the assistance of each of the
Company's product group presidents, executive officers and industry consultants
with expertise in workplace safety.
10
METALS USA, INC.
Item 2. Properties
The Company operates a number of metals processing facilities in the
Plates and Shapes and Flat Rolled Groups that are used to receive, warehouse,
process and ship metals. These facilities use various metals processing and
materials handling machinery and equipment. The Company's Building Products
Group operates several facilities where it processes metals into various
building products. These service center facilities are as follows:
Square Owned/
Location Footage Leased
-------------------------- ------- ------
Plates and Shapes Group
Northeast Plates and Shapes ............................. Baltimore, Maryland 65,000 Leased
Seekonk, Massachusetts 115,000 Owned
Camden, New Jersey 143,000 Leased
Newark, New Jersey 81,000 Leased
Ambridge, Pennsylvania 200,000 Leased
Leetsdale, Pennsylvania 239,000 Leased
Philadelphia, Pennsylvania 70,000 Leased
Philadelphia, Pennsylvania 120,000 Leased
Philadelphia, Pennsylvania 85,000 Owned
Philadelphia, Pennsylvania 45,000 Leased
York, Pennsylvania 109,000 Leased
North Central Plates and Shapes ......................... Chicago, Illinois 160,000 Leased
North Canton, Ohio 110,000 Leased
Milwaukee, Wisconsin 159,000 Leased
South Central Plates and Shapes ......................... Kansas City, Missouri* 126,000 Owned
Enid, Oklahoma 112,000 Leased
Muskogee, Oklahoma* 229,000 Owned
Dallas, Texas 104,000 Owned
Southeast Plates and Shapes ............................. Attalla, Alabama 53,000 Owned
Birmingham, Alabama 125,000 Owned
Mobile, Alabama 214,000 Owned
Muscle Shoals, Alabama 104,000 Owned
Ft. Lauderdale, Florida 27,000 Leased
Jacksonville, Florida 60,000 Owned
Lakeland, Florida 120,000 Owned
Oakwood, Georgia 206,000 Owned
Greenville, Kentucky 56,000 Owned
Waggaman, Louisiana 226,200 Owned
Columbus, Mississippi 45,000 Owned
Greensboro, North Carolina* 115,000 Owned
Wilmington, North Carolina 178,000 Leased
Wilmington, North Carolina 45,000 Leased
Chesapeake, Virginia 62,000 Leased
Southwest Plates and Shapes west Plates and Shapes ...... Hayward, California 64,000 Leased
Lafayette, Louisiana 32,000 Owned
Shreveport, Louisiana 69,000 Leased
Houston, Texas 263,500 Owned
11
METALS USA, INC.
Item 2. Properties (Continued)
Square Owned/
Location Footage Leased
-----------------------------------------------------
Southwest Plates and Shapes west Plates and Shapes ..... San Antonio, Texas 89,000 Owned
Specialty Plates and Shapes ............................ Orlando, Florida 23,000 Leased
Broadview, Illinois 61,000 Leased
Hazel Park, Michigan 73,000 Owned
Kentwood, Michigan 12,000 Leased
St. Louis, Missouri 18,000 Leased
Newark, New Jersey 41,000 Leased
Greensboro, North Carolina 62,000 Leased
Salisbury, North Carolina 24,000 Leased
Cleveland, Ohio 12,000 Leased
Moraine, Ohio 21,000 Owned
i-Solutions ............................................ Whittier, California 42,000 Leased
Fort Lauderdale, Florida 9,000 Leased
Yardley, Pennsylvania 11,000 Leased
Metals Aerospace International ......................... Santa Monica, California 50,000 Leased
Flat Rolled Group
Carbon Flat Rolled ..................................... Granite City, Illinois 300,000 Leased
Madison, Illinois 150,000 Owned
Butler, Indiana 200,000 Owned
Jeffersonville, Indiana* 90,000 Owned
Walker, Michigan 50,000 Owned
Randleman, North Carolina* 110,000 Owned
Springfield, Ohio 96,000 Owned
Wooster, Ohio* 140,000 Owned
Youngstown, Ohio 85,000 Leased
Chattanooga, Tennessee 60,000 Owned
Houston, Texas 207,000 Owned
Contract Manufacturing ................................. Eagan, Minnesota 21,000 Leased
High Point, North Carolina 45,000 Leased
Forest, Virginia 50,000 Leased
Milwaukee, Wisconsin 37,000 Leased
Specialty Flat Rolled .................................. New Hope, Minnesota 19,000 Leased
Germantown, Wisconsin 90,000 Owned
Horicon, Wisconsin* 103,000 Leased
Wichita, Kansas 24,000 Leased
Liberty, Missouri 84,000 Leased
Mokena, Illinois 21,000 Leased
Northbrook, Illinois 187,000 Owned
Brooklyn Center, Minnesota 19,000 Leased
Boise, Idaho 26,000 Leased
Billings, Montana 10,000 Leased
Eugene, Oregon 33,000 Owned
12
METALS USA, INC.
Item 2. Properties (Continued)
Square Owned/
Location Footage Leased
-------------------------------------------------------
Specialty Flat Rolled ................................ Portland, Oregon 111,000 Leased
Seattle, Washington 80,000 Owned
Spokane, Washington 49,000 Owned
Building Products Group Phoenix, Arizona 111,000 Leased
Brea, California 46,000 Leased
Buena Park, California 73,000 Leased
Corona, California 38,000 Leased
Hayward, California 24,000 Leased
Ontario, California 18,000 Leased
Rancho Cordova, California 24,000 Leased
Groveland, Florida 327,000 Leased
Leesburg, Florida 40,000 Leased
Leesburg, Florida 76,000 Leased
Leesburg, Florida 69,000 Owned
Pensacola, Florida 48,000 Leased
Stone Mountain, Georgia 60,000 Leased
Kansas City, Missouri 58,000 Leased
Las Vegas, Nevada 42,000 Leased
Las Vegas, Nevada 39,000 Leased
Irmo, South Carolina 38,000 Leased
Houston, Texas 165,000 Owned
Houston, Texas 220,000 Leased
Houston, Texas 142,000 Owned
Mesquite, Texas 200,000 Leased
Pacific, Washington 39,000 Leased
- -----------
* These facilities are subject to liens with respect to certain Industrial
Development Board debt agreements. All of the remaining owned facilities
are pledged as collateral for the Company's Senior Secured Debt.
In addition to the service center facilities listed above, the Company's
Building Products Group also operates 41 sales and distribution centers
throughout the western, southwestern and southeastern United States. These
facilities, which are all leased, generally range in size from 5,000 square feet
to 20,000 square feet. Many of the Company's facilities are capable of being
used at higher capacities, if necessary. The Company believes that its
facilities will be adequate for the expected needs of its existing businesses
over the next several years.
13
METALS USA, INC.
Item 3. Legal Proceedings
This section contains statements which 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
report for cautionary information with respect to such forward-looking
statements.
The Company is involved in a variety of claims, lawsuits and other
disputes arising in the ordinary course of business. The Company believes the
resolution of these matters and the incurrence of their related costs and
expenses should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the New York Stock Exchange since
July 11, 1997. The following table sets forth the high and low sale prices for
the Common Stock for the period from January 1, 1998 through March 14, 2001.
High Low
---- ---
1998:
January 1, 1998 to March 31, 1998 ....... $ 19.25 $ 14.00
April 1, 1998 to June 30, 1998 .......... $ 20.13 $ 16.50
July 1, 1998 to September 30, 1998 ...... $ 18.00 $ 8.75
October 1, 1998 to December 31, 1998 .... $ 11.00 $ 6.56
1999:
January 1, 1999 to March 31, 1999 ....... $ 10.50 $ 8.00
April 1, 1999 to June 30, 1999 .......... $ 13.50 $ 8.13
July 1, 1999 to September 30, 1999 ...... $ 13.00 $ 9.00
October 1, 1999 to December 31, 1999 .... $ 10.13 $ 7.44
2000:
January 1, 2000 to March 31, 2000 ....... $ 9.75 $ 6.45
April 1, 2000 to June 30, 2000 .......... $ 6.97 $ 4.06
July 1, 2000 to September 30, 2000 ...... $ 5.17 $ 2.91
October 1, 2000 to December 31, 2000 .... $ 3.38 $ 1.92
2001:
January 1, 2001 to March 14, 2001 ....... $ 3.84 $ 2.63
The Company believes there are approximately 1,600 stockholders of record
of the Company's Common Stock as of December 31, 2000.
The Company intends to retain the majority of its earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including any future acquisitions. During 2000, the Company declared four
quarterly dividends of $0.03 per share. Three of these quarterly dividends were
paid during 2000. The fourth quarterly dividend was declared on November 13,
2000 and was paid on January 11, 2001 to stockholders of record on November 17,
2000. Both the revolving credit facility and the indenture governing the
Company's 8 5/8% Senior Subordinated Notes contain restrictions as to the
payment of dividends. Under the most restrictive of these covenants, the Company
had $1.1 million available for the payment of dividends at December 31, 2000.
14
METALS USA, INC.
Item 6. Selected Financial Data
The following historical consolidated financial information should be read
in conjunction with the audited historical Consolidated Financial Statements of
Metals USA, Inc. and Subsidiaries and the Notes thereto included in Item 8.
"Financial Statements and Supplementary Data." The historical consolidated
financial information for the fiscal years ended 1996 through 2000 reflects the
historical financial statements of Metals USA, restated for the effects of the
business combinations which were accounted for as "poolings-of-interests," and
the remaining acquired companies from their respective acquisition dates.
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(In millions, except per share amounts)
Statements of Operations Data:
Net sales ................................... $ 2,021.6 $ 1,745.4 $ 1,498.8 $ 537.6 $ 265.6
Cost of sales ............................... 1,551.2 1,289.3 1,135.1 414.9 204.0
Operating and delivery ...................... 222.2 190.5 145.8 53.7 25.4
Selling, general and administrative ......... 150.8 128.4 104.7 41.1 21.4
Depreciation and amortization ............... 26.0 21.2 16.4 5.6 3.7
Integration charge .......................... -- 9.4 -- -- --
Operating income ............................ 71.4 106.6 96.8 22.3 11.1
Interest and securitization expense ......... 50.5 40.0 30.9 5.0 1.8
Other income, net ........................... (1.6) (.7) (1.6) (.5) (.6)
Income before income taxes .................. 22.5 67.3 67.5 17.8 9.9
Net income .................................. 11.7 39.8 40.0 7.5 4.5
Earnings per share .......................... $ .32 $ 1.04 $ 1.09 $ .33 $ .38
Earnings per share - assuming dilution ...... $ .32 $ 1.04 $ 1.07 $ .33 $ .38
Number of common shares used in the per share
calculations:
Earnings per share ....................... 36.8 38.1 36.7 22.5 11.8
Earnings per share - assuming dilution ... 37.0 38.4 37.3 22.9 11.8
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(In millions)
Balance Sheet Data:
Working capital ............................. $ 344.8 $ 305.4 $ 414.3 $ 191.5 $ 51.6
Total assets ................................ 1,104.8 1,049.3 1,026.4 479.1 107.3
Long-term debt, less current portion ........ 489.9 434.7 502.6 167.1 24.6
Stockholders' equity ........................ 375.1 379.4 341.6 226.5 57.5
Dividends declared(1) ....................... 4.5 -- -- -- --
- ---------
(1) Exclusive of pre-acquisition distributions of S Corporations. The Company
declared four quarterly dividends of $.03 per share during the year ended
December 31, 2000.
15
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
This section contains statements which 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
report for cautionary information with respect to such forward-looking
statements.
The following discussion should be read in conjunction with Item 6.
"Selected Financial Data" and the Company's Consolidated Financial Statements
and related Notes thereto in Item 8. "Financial Statements and Supplementary
Data."
Introduction
The Company's net sales are derived from the processing and distribution
of steel, aluminum and other specialty metals and the use of processed metals to
manufacture high-value end-use products. Most of the metal sold by the Company
is processed in some form. The Company processes various metals to specified
thickness, length, width, shape and surface quality pursuant to specific
customer orders. In addition, the Company manufactures finished building
products for commercial and residential applications and machines certain
specialty metals. See Item 1. "Business" for further discussion of the Company's
organization and business plan.
Results of Operations
Consolidated Results
The following historical financial information reflects the historical
financial statements of Metals USA, restated for the effects of certain business
combinations accounted for as "poolings-of-interests" and the remaining acquired
companies from their respective acquisition dates.
Years Ended December 31,
------------------------------------------------------------------
2000 % 1999 % 1998 %
-------- ----- -------- ----- -------- -----
(in millions, except percentages)
Net sales ..................................... $2,021.6 100.0% $1,745.4 100.0% $1,498.8 100.0%
Operating costs and expenses:
Cost of sales ........................... 1,551.2 76.7% 1,289.3 73.9% 1,135.1 75.7%
Operating and delivery .................. 222.2 11.0% 190.5 10.9% 145.8 9.7%
Selling, general and administrative ..... 150.8 7.5% 128.4 7.4% 104.7 7.0%
Depreciation and amortization ........... 26.0 1.3% 21.2 1.2% 16.4 1.1%
Integration charge ...................... -- -- 9.4 .5% -- --
-------- --- -------- --- -------- ---
Operating income 71.4 3.5% 106.6 6.1% 96.8 6.5%
Interest and securitization expense ........... 50.5 2.5% 40.0 2.3% 30.9 2.1%
Other income, net ............................. (1.6) (.1)% (.7) (.1)% (1.6) (.1)%
Income before income taxes .................... $ 22.5 1.1% $ 67.3 3.9% $ 67.5 4.5%
======== === ======== === ======== ===
Results for 2000 Compared to 1999
Net sales. Net sales increased $276.2 million, or 15.8%, from $1,745.4
million in 1999 to $2,021.6 million in 2000. The increase in net sales was due
to the full year effect of the 1999 acquisitions in 2000, together with unit
volume growth in the other subsidiaries. Material shipments for steel products
increased
16
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
14.1% and average realized prices increased by about 1.7% in 2000 compared to
1999. The full year effect of the 1999 acquisitions accounted for the
substantial portion of the increase in material shipments. See "-- Segment
Results" for additional information.
Cost of sales. Cost of sales increased $261.9 million, or 20.3%, from
$1,289.3 million in 1999 to $1,551.2 million in 2000. The increase in cost of
sales was principally due to the full year effect of the 1999 acquisitions
described above. As a percentage of net sales, cost of sales increased from
73.9% in 1999 to 76.7% in 2000. This percentage increase was principally due to
higher costs of raw materials.
Operating and delivery. Operating and delivery expenses increased $31.7
million, or 16.6%, from $190.5 million in 1999 to $222.2 million in 2000. The
increase in operating and delivery expenses was principally due to the full year
effect of the 1999 acquisitions described above. As a percentage of net sales,
operating and delivery expenses remained fairly constant at 10.9% in 1999 and
11.0% in 2000.
Selling, general and administrative. Selling, general and administrative
expenses increased $22.4 million, or 17.4%, from $128.4 million in 1999 to
$150.8 million in 2000. This increase in selling, general and administrative
expenses was primarily attributable to the full year effect of the 1999
acquisitions described above, net of the savings realized from the integration
plan. As a percentage of net sales, selling, general and administrative expenses
remained fairly constant at 7.4% in 1999 and 7.5% in 2000.
Operating income. Operating income decreased $35.2 million, or 33.0%, from
$106.6 million in 1999 to $71.4 million in 2000. Exclusive of the integration
charge in 1999, operating income decreased by $44.6 million, or 38.4%. The
decrease in operating income was primarily attributable to higher costs of raw
materials, as other costs and expenses remained relatively constant as a
percentage of net sales. Operating income as a percentage of net sales,
decreased from 6.1% in 1999 to 3.5% in 2000. Exclusive of the integration
charge, operating income as a percentage of net sales would have been 6.6% in
1999.
Interest and securitization expense. Interest and securitization expense
increased $10.5 million, or 26.3%, from $40.0 million in 1999 to $50.5 million
in 2000. The increase was due to increased levels of borrowings as well as
increased interest rates. The credit facility accounted for $7.6 million of the
increase and the accounts receivable securitization facility accounted for $2.3
million. See "--Liquidity and Capital Resources - Financing Activities."
Provision for income taxes. The Company's provision for income taxes
differs from the federal statutory rate principally due to state income taxes
(net of federal income tax benefit) and the non-deductibility of the
amortization of goodwill attributable to certain acquisitions.
Results for 1999 Compared to 1998
Net sales. Net sales increased $246.6 million, or 16.5%, from $1,498.8
million in 1998 to $1,745.4 million in 1999. The increase in net sales was due
to acquisitions, together with unit volume growth in the other subsidiaries.
Material shipments for steel products increased 31.1% and average realized
prices decreased in 1999 compared to 1998. Acquisitions accounted for the
substantial portion of the increase in material shipments. See "-- Segment
Results" for additional information.
Cost of sales. Cost of sales increased $154.2 million, or 13.6%, from
$1,135.1 million in 1998 to $1,289.3 million in 1999. The increase in cost of
sales was principally due to the acquisitions described above. As a
17
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
percentage of net sales, cost of sales decreased from 75.7% in 1998 to 73.9% in
1999. This percentage decrease was principally due to lower costs of raw
materials.
Operating and delivery. Operating and delivery expenses increased $44.7
million, or 30.7%, from $145.8 million in 1998 to $190.5 million in 1999. The
increase in operating and delivery expenses was principally due to the
acquisitions described above. As a percentage of net sales, operating and
delivery expenses increased from 9.7% in 1998 to 10.9% in 1999. This percentage
increase was primarily due to lower average realized prices.
Selling, general and administrative. Selling, general and administrative
expenses increased $23.7 million, or 22.6%, from $104.7 million in 1998 to
$128.4 million in 1999. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above. As a
percentage of net sales, selling, general and administrative expenses increased
from 7.0% in 1998 to 7.4% in 1999. Excluding the effect of the non-recurring
charge of $2.6 million attributable to the termination of the ESOP in 1998, as a
percentage of net sales, selling, general and administrative expenses increased
from 6.8% in 1998 to 7.4% in 1999. This percentage increase was primarily due to
lower average realized prices.
Operating income. Operating income increased $9.8 million, or 10.1%, from
$96.8 million in 1998 to $106.6 million in 1999. The increase in operating
income was primarily attributable to the acquisitions described above, offset by
the $9.4 integration charge. Excluding the effect of the non-recurring charge of
$2.6 million attributable to the termination of the ESOP in 1998 and the effect
of the integration charge in 1999, as a percentage of net sales, operating
income was unchanged at 6.6% for both periods.
Interest and securitization expense. Interest and securitization expense
increased $9.1 million, or 29.4%, from $30.9 million in 1998 to $40.0 million in
1999. The increase was due to increased borrowings in connection with the
acquisitions described above and the Company's 8 5/8% $200.0 million Senior
Subordinated Notes due 2008 (the "Notes"). See "--Liquidity and Capital
Resources - Financing Activities."
Provision for income taxes. The Company's provision for income taxes
differs from the federal statutory rate principally due to state income taxes
(net of federal income tax benefit) and the non-deductibility of the
amortization of goodwill attributable to certain acquisitions.
18
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Segment Results
Fiscal Years Ended December 31,
-------------------------------------------------------------------------------------------------------
Operating Operating
Net Costs and Income Capital Shipments
Sales % Expenses % (Loss) % Expenditures (1)
-------- -------- -------- -------- --------- -------- ------------ ---------
2000: (in millions, except percentages)
Plates and Shapes ..... $ 965.1 47.7% $ 916.0 47.0% $ 49.1 68.8% $ 14.0 1,469
Flat Rolled ........... 937.3 46.4% 910.3 46.7% 27.0 37.8% 12.7 1,445
Building Products ..... 170.2 8.4% 160.2 8.2% 10.0 14.0% 6.3 --
Corporate and other ... (51.0) (2.5)% (36.3) (1.9)% (14.7) (20.6)% 4.3 (95)
-------- -------- -------- -------- -------- -------- -------- ------
Total .............. $2,021.6 100.0% $1,950.2 100.0% $ 71.4 100.0% $ 37.3 2,819
======== ======== ======== ======== ======== ======== ======== ======
1999:
Plates and Shapes ..... $ 861.2 49.3% $ 802.2 49.0% $ 59.0 55.3% $ 17.5 1,321
Flat Rolled ........... 794.0 45.5% 746.0 45.5% 48.0 45.0% 14.2 1,267
Building Products ..... 126.7 7.3% 116.4 7.1% 10.3 9.7% 2.6 --
Corporate and other ... (36.5) (2.1)% (25.8) (1.6)% (10.7) (10.0)% .9 (73)
-------- -------- -------- -------- -------- -------- -------- ------
Total .............. $1,745.4 100.0% $1,638.8 100.0% $ 106.6 100.0% $ 35.2 2,515
======== ======== ======== ======== ======== ======== ======== ======
1998:
Plates and Shapes ..... $ 782.7 52.2% $ 721.2 51.4% $ 61.5 63.5% $ 13.2 1,013
Flat Rolled ........... 632.8 42.2% 595.1 42.5% 37.7 38.9% 10.2 962
Building Products ..... 93.4 6.2% 84.1 6.0% 9.3 9.6% 1.7 --
Corporate and other ... (10.1) (0.6)% 1.6 0.1% (11.7) (12.0)% 0.2 (18)
-------- -------- -------- -------- -------- -------- -------- ------
Total .............. $1,498.8 100.0% $1,402.0 100.0% $ 96.8 100.0% $ 25.3 1,957
======== ======== ======== ======== ======== ======== ======== ======
(1) Shipments are expressed in thousands of tons and are not an
appropriate measure of volume for the Building Products Group
Segment Results -- 2000 compared to 1999
Plates and Shapes. Net sales increased $103.9 million, or 12.1%, from
$861.2 million in 1999 to $965.1 million in 2000. The increase in net sales is
due to unit volume growth. Material shipments increased 11.2% in 2000 compared
to 1999. Operating costs and expenses increased $113.8 million, or 14.2%, from
$802.2 million in 1999 to $916.0 million in 2000. Operating costs and expenses
as a percentage of net sales increased from 93.1% in 1999 to 94.9% in 2000
primarily due to higher costs of raw materials. Operating income decreased by
$9.9 million, or 16.8%, from $59.0 million in 1999 to $49.1 million in 2000.
Operating income as a percentage of net sales decreased from 6.9% in 1999 to
5.1% in 2000, primarily due to higher costs of raw materials.
Flat Rolled. Net sales increased $143.3 million, or 18.0%, from $794.0
million in 1999 to $937.3 million in 2000. The increase in net sales is
principally due to the full year effect of the 1999 acquisitions in 2000.
Material shipments increased 14.1% in 2000 compared to 1999, while average
realized prices for steel products increased approximately 3.5% during the same
period. Operating costs and expenses increased $164.3 million, or 22.0%, from
$746.0 million in 1999 to $910.3 million in 2000. Operating costs and expenses
as a percentage of net sales increased from 94.0% in 1999 to 97.1% in 2000 as a
result of higher costs of raw materials. Operating income decreased by $21.0
million, or 43.8%, from $48.0 million in 1999 to $27.0 million in 2000.
Operating income as a percentage of net sales decreased from 6.0% in 1999 to
2.9% in 2000, primarily due to higher costs of raw materials.
Building Products. Net sales increased $43.5 million, or 34.3%, from
$126.7 million in 1999 to $170.2 million in 2000. The increase in net sales is
attributable to the increased demand for the Company's
19
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
manufactured products and acquisitions. Operating costs and expenses increased
$43.8 million, or 37.6%, from $116.4 million in 1999 to $160.2 million in 2000.
Operating costs and expenses as a percentage of net sales increased from 91.9%
in 1999 to 94.1% in 2000. This percentage increase was due to higher costs of
raw materials and an expanded number of distribution facilities. Operating
income decreased by $0.3 million, or 2.9%, from $10.3 million in 1999 to $10.0
million in 2000. This decrease was principally due higher costs of raw
materials. Operating income as a percentage of net sales decreased from 8.1% in
1999 to 5.9% in 2000.
Corporate and other. This category reflects certain administrative costs
and expenses management has not allocated to its industry segments. The negative
net sales amount represents the elimination of intercompany sales. Operating
loss increased by $4.0 million, or 37.4%, from $10.7 million in 1999 to $14.7
million in 2000. This increase was principally due to costs associated with the
systems integration project.
Segment Results -- 1999 compared to 1998
Plates and Shapes. Net sales increased $78.5 million, or 10.0%, from
$782.7 million in 1998 to $861.2 million in 1999. The increase in net sales is
due to acquisitions together with unit volume growth in the other subsidiaries.
Material shipments increased 30.5% in 1999 compared to 1998, offset by lower
average realized prices, which decreased approximately 19.2% in 1999 compared to
1998. Operating costs and expenses increased $81.0 million, or 11.2%, from
$721.2 million in 1998 to $802.2 million in 1999. Operating costs and expenses
as a percentage of net sales increased marginally, from 92.1% in 1998 to 93.1%
in 1999. Operating income decreased by $2.5 million, or 4.1%, from $61.5 million
in 1998 to $59.0 million in 1999. Operating income as a percentage of net sales
decreased from 7.9% in 1998 to 6.9% in 1999, primarily due to lower average
realized prices.
Flat Rolled. Net sales increased $161.2 million, or 25.5%, from $632.8
million in 1998 to $794.0 million in 1999. The increase in net sales is
principally due to acquisitions. Material shipments increased 31.7% in 1999
compared to 1998, offset by lower average realized prices for steel products,
which decreased approximately 4.7% in 1999 compared to 1998. Operating costs and
expenses increased $150.9 million, or 25.4%, from $595.1 million in 1998 to
$746.0 million in 1999. Operating costs and expenses as a percentage of net
sales remained constant at 94% in both 1998 and 1999. Operating income increased
by $10.3 million, or 27.3%, from $37.7 million in 1998 to $48.0 million in 1999.
Operating income as a percentage of net sales also remained constant at 6.0% for
both 1998 and 1999.
Building Products. Net sales increased $33.3 million, or 35.7%, from $93.4
million in 1998 to $126.7 million in 1999. The increase in net sales is
attributable to acquisitions and the increased demand for the Company's
manufactured products. Operating costs and expenses increased $32.3 million, or
38.4%, from $84.1 million in 1998 to $116.4 million in 1999. Operating costs and
expenses as a percentage of net sales increased from 90.0% in 1998 to 91.9% in
1999. This percentage increase was due to higher cost of raw materials and
expansion of distribution facilities. Operating income increased by $1.0
million, or 10.8%, from $9.3 million in 1998 to $10.3 million in 1999. This
increase was principally due to 1999 being a full year of operations for the
1998 acquired companies. Operating income as a percentage of net sales decreased
from 10.0% in 1998 to 8.1% in 1999.
Corporate and other. This category reflects certain administrative costs
and expenses management has not allocated to its industry segments. The negative
net sales amount represents the elimination of intercompany sales. Operating
loss decreased by $1.0 million, or 8.5%, from $11.7 million in 1998 to $10.7
million in 1999. This decrease was principally due to lower incentive
compensation expense.
20
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources
Beginning with the Company's Initial Public Offering on July 11, 1997, and
through March 2001, the Company has completed a number of financing transactions
designed to enhance the Company's liquidity, reduce incremental interest expense
and extend debt maturities. The transactions included a public equity offering
of Common Stock which resulted in net proceeds of $58.3 million, the sale of
$200.0 million aggregate principal amount of 8 5/8% Senior Subordinated Notes
due 2008 (the "Notes"), the establishment of a $450.0 million credit facility
with a group of commercial banks (the "New Credit Facility"), comprised of a
$350.0 million secured revolving credit facility and a $100.0 million loan to an
unrestricted wholly-owned subsidiary secured by trade receivables. The New
Credit Facility was entered into effective March 14, 2001. The former credit
facility ("Former Credit Facility") was in effect through that date. See
"--Financing Activities."
At December 31, 2000, the Company had cash of $3.8 million, working
capital of $344.8 million and total debt of $493.0 million. At December 31,
1999, the Company had cash of $4.7 million, working capital of $305.4 million
and total debt of $440.8 million. The increase in working capital and debt at
December 31, 2000 compared to December 31, 1999 is primarily attributable to the
Company's increased inventory levels. At March 14, 2001, the Company had $71
million of borrowing availability under the terms of the New Credit Facility.
The Company anticipates that its cash flow from operations, together with
borrowings under the New Credit Facility, will be sufficient to meet the
Company's normal working capital and debt service requirements for at least the
next several years, exclusive of any acquisition requirements.
The Company used $2.3 million and provided $98.6 million in net cash from
operating activities for 2000 and 1999, respectively. Net cash used in investing
activities was $33.2 million and $15.6 million for 2000 and 1999, respectively.
The principal use of cash during 2000 was for capital expenditures and in 1999
was for the cash portion of the 1999 acquisitions and capital expenditures,
offset by the sale of $90 million of accounts receivable in connection with the
Securitization Facility. Net cash provided by financing activities was $34.6
million for 2000 and consisted primarily of additional borrowings on the Former
Credit Facility. Net cash used in financing activities during 1999 was $87.6
million, which was used primarily to repay borrowings on the Former Credit
Facility, primarily from the proceeds of the former receivable securitization
facility. See "--Financing Activities."
Investing Activities
During 2000, the Company had one acquisition, the assets of a flat-rolled
processing operation in Chattanooga, Tennessee. The aggregate consideration paid
for this acquisition was $7.8 million in cash. Capital expenditures for
equipment and expansion of facilities are expected to be funded from cash flow
from operations and supplemented as necessary by borrowings from the New Credit
Facility or other sources of financing.
Financing Activities
On March 14, 2001, the Company entered into two new financing agreements
with Bank of America N.A. ("Bank of America") and PNC Bank N.A. ("PNC Bank").
Collectively, the agreements are referred to as the "New Credit Facility". The
New Credit Facility is for a period of three years, represents $450.0 million in
financing, and replaced the Former Credit Facility which consisted of a $300.0
million revolving credit facility and a $100.0 million accounts receivable
securitization facility. The New Credit Facility is comprised of two
21
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
separate loans, a revolving credit facility providing up to $350.0 million in
borrowings and a $100.0 million loan to a wholly-owned and unrestricted
subsidiary of the Company secured solely by accounts receivable. The New Credit
Facility will be secured by all of the Company's receivables (not otherwise
pledged under the accounts receivable facility), inventories, and property and
equipment. Borrowings under the New Credit Facility are limited to the lesser of
a borrowing base, comprised of eligible receivables and inventories, or $450.0
million in the aggregate.
The New Credit Facility matures in March 2004, bears interest at the
bank's prime rate or LIBOR, at Metals USA's option, plus an applicable margin
based on a ratio of EBITDA (as defined and adjusted) to cash interest expense
(the "Fixed Charge Coverage Ratio"). Initially the spread over LIBOR will be at
2.75%. A commitment fee is payable on any unused portion of the New Credit
Facility. The commitment fee varies between 1/2% and 1/4% per annum, based on
the Fixed Charge Coverage Ratio. The Company will use the New Credit Facility to
initially repay the borrowings under the Former Credit Facility and thereafter
to finance its working capital requirements, to make capital expenditures, fund
acquisitions, including the refinancing of the debt of the companies acquired,
and for general corporate purposes. Borrowings under the New Credit Facility are
guaranteed by each of the Company's restricted subsidiaries (as defined under
the Notes).
The New Credit Facility requires the Company to comply with various
customary affirmative, negative and subjective covenants including: (i) the
maintenance of certain financial ratios and borrowing base availability, (ii)
restrictions on additional indebtedness, (iii) restrictions on liens, guarantees
and quarterly dividends, (iv) obtaining the lenders' consent with respect to
certain individual acquisitions, and (v) maintenance of a specified level of
consolidated tangible net worth. The New Credit Facility allows for the payment
of up to $1.1 million of dividends in any fiscal quarter provided that
availability is greater than $45.0 million. At December 31, 2000, the Company
had accrued $1.1 million for dividends which were paid in January 2001 under the
terms of the Former Credit Facility. At March 14, 2001 the Company had $1.1
million available for the payment of dividends.
Concurrent with executing the New Credit Facility, the Company entered
into two interest rate swap agreements designed as a partial hedge to the
Company's variable rate borrowings under the New Credit Facility. The purpose of
these swap agreements is to fix interest rates on a portion of its borrowings
under the Credit Facility, thereby reducing exposure to interest rate
fluctuations. At March 14, 2001, the Company had interest rate swap agreements
with a notional amount of $100.0 million compared to the total borrowings under
the New Credit Facility of $327.9 million. Under these agreements, the Company
will pay the counterparties interest at a weighted average fixed rate of 5.48%
and the counterparties will pay the Company interest at a variable rate equal to
LIBOR. The weighted average LIBOR rate applicable to these agreements was 5.15%
at March 14, 2001. The notional amounts do not represent amounts exchanged by
the parties, and thus are not a measure of exposure of the Company. The weighted
average variable rates are subject to change over time based on fluctuations in
the 90-day LIBOR rate. The swap agreements expire on March 14, 2004.
Neither the Company nor the counterparties, which are prominent financial
institutions, are required to collateralize their respective obligations under
these agreements. The Company is exposed to loss if one or both of the
counterparties default. At March 14, 2001, the Company had no exposure to credit
loss on the interest rate swaps. The Company does not believe that any
reasonably likely change in interest rates would have a material adverse effect
on the financial position, results of operations or cash flows of the Company.
The Company had entered into two swap agreements in connection with its Former
Credit Facility for an aggregate notional amount of $125.0 million. These swaps
expired during the fourth quarter of 2000.
22
METALS USA, INC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
As part of the Former Credit Facility, on January 21, 1999, the Company
established an accounts receivable securitization facility to sell, on a
revolving basis, through its wholly-owned subsidiary, Metals Receivables
Corporation ("MRC"), an undivided interest in a designated pool of its trade
accounts receivable to a commercial bank. The maximum undivided interest in
MRC's receivable portfolio that may be purchased pursuant to this agreement was
$100.0 million. The Company retained collection and administrative
responsibilities for the participating interests sold. As collections reduce the
receivables included in MRC's receivable portfolio, the Company sold additional
undivided interests in new receivables. The amount of the undivided interest in
MRC's receivable portfolio that was sold typically changed monthly depending
upon the level of defined eligible receivables available for sale each month
adjusted by certain defined ratios. The unpurchased portion of the MRC
receivable portfolio was a restricted asset and was effectively collateral for
the benefit of the bank. At December 31, 2000 and 1999, the unpurchased portion
of the MRC portfolio was $48.3 million and $37.2 million, respectively. The
receivable securitization facility was terminated with the execution of the New
Credit Facility.
On April 22, 1999, the Company announced that the Board of Directors had
approved the use of up to $25.0 million to repurchase shares of the Company's
Common Stock. The shares were purchased, from time to time, in open market
transactions. During the year ended December 31, 1999, the Company had
repurchased 461,450 shares at an average price of $9.77 per share, including
fees and commissions. During 2000, the Company repurchased an additional
1,544,993 shares at an average price of $7.47 per share, including fees and
commissions. Also in 2000, the Company retired all of its Treasury Stock
(2,006,443 shares) thereby reducing the number of outstanding shares by a like
amount. The Company does not anticipate continuing this repurchase program in
2001.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This standard requires entities to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
the Company beginning January 1, 2001. The Company adopted these standards
effective January 1, 2001 and there was no impact as the Company was not a party
to any derivative instruments at that date. Subsequent to year-end, however, the
Company entered into two interest rate swap agreements in connection with the
New Credit Facility and such agreements will be accounted for in accordance with
SFAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements", to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. The SEC Staff issuance of SAB No.
101B on June 26, 2000 extended the compliance requirement until the fourth
quarter of fiscal years beginning after December 15, 1999, with an effective
date of January 1, 2000. The Company has reviewed its revenue recognition
policies and believes it is, and has been, in compliance with the interpretive
guidance set forth in SAB 101.
23
METALS USA, INC.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
Accordingly, the Company may enter into certain derivative financial instruments
such as interest rate swap agreements. The Company does not use derivative
financial instruments for trading or to speculate on changes in interest rates.
Interest Rate Exposure
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's Credit Facility (Former and New).
Approximately 53.3% ($263.0 million) and 44.5% ($196.0 million) of the Former
Credit Facility was subject to variable interest rates as of December 31, 2000
and 1999, respectively. The Company entered into two interest rate swap
agreements in 1998 to reduce exposure to interest rate changes. These agreements
fixed interest rates for two years on $125.0 million of the variable interest
Former Credit Facility and expired in December 2000. Concurrent with the
execution of the New Credit Facility, the Company entered into two interest rate
swap agreements. These agreements fix interest rates for three years on $100.0
million of the variable interest New Credit Facility, or 30.6% of the total
outstanding as of March 14, 2001. The detrimental effect of a hypothetical 100
basis point increase in interest rates would be to reduce income before taxes by
$2.6 million and $0.7 million at December 31, 2000 and 1999, respectively. As of
December 31, 2000 and 1999, the fair value of the Company's fixed rate debt was
approximately $147.1 million and $224.8 million, respectively, based upon
discounted future cash flows using current market prices. The fair value of the
interest rate swap agreements were $1.5 million at December 31, 1999 and zero at
March 14, 2001. There were no interest rate swap agreements in place at December
31, 2000.
24
METALS USA, INC. AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants......................... 26
Consolidated Balance Sheets...................................... 27
Consolidated Statements of Operations............................ 28
Consolidated Statements of Stockholders' Equity.................. 29
Consolidated Statements of Cash Flows............................ 30
Notes to Consolidated Financial Statements....................... 31
25
METALS USA, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metals USA, Inc.:
We have audited the accompanying consolidated balance sheets of Metals USA, Inc.
(a Delaware corporation) and subsidiaries (the "Company") as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Metals
USA, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 2001
26
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
December 31,
---------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash ........................................................................ $ 3.8 $ 4.7
Accounts receivable, net of allowance of $7.4 and $6.2, respectively ........ 72.5 91.7
Restricted receivables for accounts receivable securitization ............... 48.3 37.2
Inventories ................................................................. 402.2 350.5
Prepaid expenses and other .................................................. 14.4 15.4
Deferred income taxes ....................................................... 6.2 6.4
-------- --------
Total current assets 547.4 505.9
Property and equipment, net .................................................... 249.3 223.0
Goodwill, net .................................................................. 296.8 305.4
Other assets, net .............................................................. 11.3 15.0
-------- --------
Total assets $1,104.8 $1,049.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 157.9 $ 145.5
Accrued liabilities ......................................................... 41.6 48.9
Current portion of long-term debt ........................................... 3.1 6.1
-------- --------
Total current liabilities ................................................ 202.6 200.5
Long-term debt, less current portion ........................................... 489.9 434.7
Deferred income taxes .......................................................... 32.9 29.5
Other long-term liabilities .................................................... 4.3 5.2
-------- --------
Total liabilities 729.7 669.9
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 203,122,914 shares authorized,
36,509,972 and 38,516,415 shares issued, respectively ................. .4 .4
Additional paid-in capital .............................................. 247.7 263.7
Retained earnings ....................................................... 127.0 119.8
Treasury stock -- None and 461,450 shares, at cost ..................... -- (4.5)
-------- --------
Total stockholders' equity .......................................... 375.1 379.4
-------- --------
Total liabilities and stockholders' equity ..................... $1,104.8 $1,049.3
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
27
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
For the Years Ended
December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Net sales ..................................................... $ 2,021.6 $ 1,745.4 $ 1,498.8
Operating costs and expenses:
Cost of sales ............................................. 1,551.2 1,289.3 1,135.1
Operating and delivery .................................... 222.2 190.5 145.8
Selling, general and administrative ....................... 150.8 128.4 104.7
Depreciation and amortization Depreciation and amortization 26.0 21.2 16.4
Integration charge ............................................ -- 9.4 --
--------- --------- ---------
Operating income .............................................. 71.4 106.6 96.8
Other (income) expense:
Interest and securitization expense ....................... 50.5 40.0 30.9
Other income .............................................. (1.6) (.7) (1.6)
--------- --------- ---------
Income before income taxes .................................... 22.5 67.3 67.5
Provision for income taxes .................................... 10.8 27.5 27.5
--------- --------- ---------
Net income .................................................... $ 11.7 $ 39.8 $ 40.0
========= ========= =========
Earnings per share ............................................ $ .32 $ 1.04 $ 1.09
========= ========= =========
Earnings per share-- assuming dilution ........................ $ .32 $ 1.04 $ 1.07
========= ========= =========
Number of common shares used in the per share calculations:
Earnings per share ............................................ 36.8 38.1 36.7
========= ========= =========
Earnings per share-- assuming dilution ........................ 37.0 38.4 37.3
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
28
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
Additional Treasury
Common Paid-In Unearned Retained Stock,
Stock Capital Compensation Earnings At cost Total
------ --------- ------------ -------- -------- ------
BALANCE, December 31, 1997 ........................... $ .3 $184.6 $ (1.5) $ 43.1 $ -- $226.5
Shares issued in connection with the
1998 Acquisitions ............................. .1 73.8 -- -- -- 73.9
Shares released under leveraged ESOP Plan ........ -- 2.1 1.5 -- -- 3.6
Stock options exercised and other adjustments .... -- .2 -- -- -- .2
Capital contributions attributable to deemed
tax payments of S Corporations ................ -- .5 -- -- -- .5
Distributions by pooled companies prior
to acquisition ................................ -- -- -- (3.1) -- (3.1)
Net income ....................................... -- -- -- 40.0 -- 40.0
------ ------ ------ ------ ------ ------
BALANCE, December 31, 1998 ........................... .4 261.2 -- 80.0 -- 341.6
Shares issued in connection with the 1999
Acquisitions .................................. -- 2.1 -- -- -- 2.1
Stock options exercised and other adjustments .... -- .4 -- -- -- .4
Shares repurchased ............................... -- -- -- -- (4.5) (4.5)
Net income ....................................... -- -- -- 39.8 -- 39.8
------ ------ ------ ------ ------ ------
BALANCE, December 31, 1999 ........................... .4 263.7 -- 119.8 (4.5) 379.4
Shares repurchased ............................... -- -- -- -- (11.5) (11.5)
Cancellation of Treasury Shares .................. -- (16.0) -- -- 16.0 --
Dividends ........................................ -- -- -- (4.5) -- (4.5)
Net income ....................................... -- -- -- 11.7 -- 11.7
------ ------ ------ ------ ------ ------
BALANCE, December 31, 2000 ........................... $ .4 $247.7 $ -- $127.0 $ -- $375.1
====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of
these consolidated financial statements.
29
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
For the Years Ended
December 31,
----------------------------
2000 1999 1998
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 11.7 $ 39.8 $ 40.0
Adjustments to reconcile net income to net cash provided by (used in) operating
activities --
Capital contributions attributable to deemed tax payments of S
Corporations ............................................................... -- -- .5
Provision for bad debts .................................................... 4.1 1.4 1.7
Depreciation and amortization .............................................. 26.0 21.2 16.4
Deferred income tax provision .............................................. 2.5 9.9 4.3
Compensation expense-- non-cash ............................................ -- -- 2.6
Changes in operating assets and liabilities, net of acquisitions
and non-cash transactions--
Accounts receivable .................................................... (4.6) (16.2) (2.7)
Inventories ............................................................ (48.3) 19.0 (49.0)
Prepaid expenses and other assets ...................................... (.2) .6 (11.8)
Accounts payable and accrued liabilities ............................... 6.9 27.6 (6.4)
Income taxes payable ................................................... -- (6.2) (7.7)
Other operating, net ....................................................... .9 1.5 1.3
------ ------ ------
Net cash provided by (used in) operating activities .................... (1.0) 98.6 (10.8)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of acquired cash .................................. (7.8) (74.1) (186.2)
Purchase of property and equipment ............................................ (37.3) (35.2) (25.3)
Proceeds from securitization of receivables ................................... 10.0 90.0 --
1.9 3.7 .3
------ ------ ------
Other investing, net ............................................................... (33.2) (15.6) (211.2)
------ ------ ------
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on revolving credit facilities .................... 55.2 (79.0) 34.7
Issuance of 8 5/8% Senior Subordinated Notes .................................. -- -- 200.0
Net borrowings (repayments) on long-term debt ................................. (5.9) (3.8) .6
Issuance (repurchases) of stock ............................................... (11.5) (4.5) .3
Payment of dividends .......................................................... (3.3) -- --
Deferred financing costs incurred ............................................. (1.3) (.6) (7.9)
Distributions by pooled companies prior to acquisition ........................ -- -- (3.1)
Other financing, net .......................................................... .1 .3 (.6)
------ ------ ------
Net cash provided by (used in) financing activities .................... 33.3 (87.6) 224.0
------ ------ ------
NET INCREASE (DECREASE) IN CASH .................................................... (.9) (4.6) 2.0
CASH, beginning of year ............................................................ 4.7 9.3 7.3
------ ------ ------
CASH, end of year .................................................................. $ 3.8 $ 4.7 $ 9.3
====== ====== ======
The accompanying notes are an integral part of
these consolidated financial statements.
30
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share amounts)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Metals USA, Inc., a Delaware corporation, ("Metals USA") was founded on
July 3, 1996 to become a leading national value-added metals processor and
distributor, to manufacture higher-value components from processed metals and to
pursue the consolidation of the highly fragmented metals processing industry.
Prior to its initial public offering ("IPO"), Metals USA had conducted no
operations. Concurrent with the consummation of its IPO on July 11, 1997, Metals
USA acquired, in separate transactions (the "Mergers") eight companies (the
"Founding Companies") engaged in the processing of steel, aluminum and specialty
metals, as well as the manufacture of metal components. Following the IPO and
through December 31, 2000, Metals USA acquired numerous additional metal
processing companies and businesses (See Note 2). Certain of the companies
acquired after the IPO were accounted for using the "pooling-of-interests"
method, resulting in a restatement of the Company's consolidated financial
statements for all periods presented (See Note 2). References herein to the
"Company" include Metals USA and its subsidiaries.
The Company sells to businesses such as the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. The Company believes that its broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduce the Company's susceptibility to economic fluctuations affecting any one
industry or geographical area.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and expenses recognized during the periods
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to their publication. 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.
Summary of Significant Accounting Policies
Principles of Consolidation -- The consolidated financial statements
include the accounts of Metals USA and its subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation, primarily
relating to the segment disclosure (see Note 11).
Inventories -- Inventories are stated at the lower of cost or market.
Certain of the Company's subsidiaries use the last-in, first-out ("LIFO") method
of accounting for inventories and other subsidiaries use a variety of methods
including specific identification, average cost and the first-in first-out
("FIFO") method of accounting. As of December 31, 2000 and 1999, approximately
10.5% and 20.1%, respectively, of the consolidated inventories were accounted
for using the LIFO method of accounting.
31
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
1. Basis of Presentation and Summary of Significant Accounting Policies
(Continued)
Property and Equipment -- Property and equipment are stated at cost, and
depreciation is computed using the straight-line method, net of estimated
salvage values, over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset. Depreciation and amortization
expense related to property and equipment was approximately $17.8, $13.9 and
$10.5 for the years ended December 31, 2000, 1999 and 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such asset is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value.
Goodwill -- Goodwill represents the excess of cost over the estimated fair
value of identifiable assets of the businesses acquired using the "purchase"
method of accounting. Goodwill is stated at cost, net of accumulated
amortization, and is being amortized over a forty-year life using the
straight-line method. Goodwill amortization expense for the years ended December
31, 2000, 1999 and 1998 was $8.0, $6.9, and $5.6, respectively. Management
continually evaluates whether events or circumstances have occurred that
indicate that the remaining estimated useful life of goodwill may warrant
revision or that the remaining balance may not be recoverable. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset will be compared to the asset's carrying amount to determine if such an
impairment exists. The Company has not recorded any impairment losses with
respect to goodwill or other long-lived assets to date.
Debt Issuance Costs-- The Company defers certain expenses incurred in
connection with its long-term debt and amortizes them over the term of the
respective agreements. Amortization expense for the years ended December 31,
2000, 1999 and 1998, totaled $1.9, $1.3 and $0.9, respectively, and is included
in interest and securitization expense on the consolidated statements of
operations.
Fair Value of Financial Instruments -- The carrying values of cash,
accounts receivable and accounts payable approximate fair value. The fair value
of the long-term debt is estimated based on interest rates for the same or
similar debt offered to the Company having the same or similar remaining
maturities and collateral requirements. At December 31, 2000, the fair value of
the Company's fixed rate long-term debt of $230.0 was $147.1. The carrying
amount of the Company's variable rate long-term debt of $263.0 approximates its
fair value.
Interest Rate Swap Agreements -- The Company has entered into interest
rate swap agreements to fix interest rates on variable rate debt and reduce
exposure to interest rate fluctuations. Such agreements involve the exchange of
amounts based on fixed interest rates for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which payments are based. The differential to be paid or received as
interest rates change is accounted for on the accrual method of accounting.
32
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
1. Basis of Presentation and Summary of Significant Accounting Policies
(Continued)
The related amount payable or receivable from counterparties is included as an
adjustment to accrued interest in other accrued liabilities. In the event of
early extinguishment, any gain or loss would be recognized in income at the time
of extinguishment. At December 31, 2000, there were no interest rate swap
agreements outstanding.
Concentration of Credit Risk -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. Concentrations of credit
risk with respect to trade accounts are within the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. Generally, credit is extended once
appropriate credit history and references have been obtained. Provisions to the
allowance for doubtful accounts are made monthly and adjustments are made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Additionally, the Company periodically reviews the credit
history of its customers and generally does not require collateral for the
extension of credit.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting
for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for
the future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the amount of taxes payable and the
applicable changes in deferred tax assets and liabilities.
Revenue Recognition -- The Company recognizes revenues as products are
shipped. In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements", to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. The SEC Staff issuance of SAB No.
101B on June 26, 2000 extended the compliance requirement until the fourth
quarter of fiscal years beginning after December 15, 1999, with an effective
date of January 1, 2000. The Company has reviewed its revenue recognition
policies and believes that it is, and has been, in compliance with the
interpretive guidance set forth in SAB No. 101.
Earnings per Share -- The Company computes earnings per share in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), Earnings Per Share. SFAS No. 128 requires presentation of basic earnings
per share ("Earnings per Share") and diluted earnings per share ("Earnings per
Share -- Assuming Dilution"). Earnings per Share excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Earnings per
Share -- Assuming Dilution reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock.
33
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
1. Basis of Presentation and Summary of Significant Accounting Policies
(Continued)
The number of shares used in the per share calculations consists of the
following:
Years Ended December 31,
----------------------------
2000 1999 1998
---- ---- ----
(In millions)
Number of shares used in computing earnings per share (weighted
average shares) ..................................................... 36.8 38.1 36.7
Effect of dilutive securities:
Stock options ................................................... -- .1 .5
Convertible securities .......................................... .2 .2 .1
---- ---- ----
Number of shares used in computing earnings per share --
assuming dilution (weighted average shares) ......................... 37.0 38.4 37.3
==== ==== ====
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
This standard requires entities to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. The
statement requires that changes in the derivatives' fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133, as amended, is effective for the Company beginning January 1, 2001. The
Company adopted these standards effective January 1, 2001 and there was no
impact as the Company was not a party to any derivative instruments at that
date. Subsequent to year-end, however, the Company entered into two interest
rate swap agreements in connection with the New Credit Facility and such
agreements will be accounted for in accordance with SFAS No. 133.
2. Business Combinations
Pooling Transactions
During 1998, Metals USA completed the acquisition of all the capital stock
of Krohn Steel Service Center, Inc. ("Krohn") in a business combination
accounted for as a "pooling-of-interests" transaction in accordance with the
requirements of APB No. 16. Krohn is a processor of flat rolled steel and is
headquartered in Springfield, Ohio.
34
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
1. Business Combinations (Continued)
Purchase Transactions
During the year ended December 31, 1998, the Company acquired several
metal processing companies and businesses using the "purchase" method of
accounting. The aggregate consideration paid by Metals USA for the 1998
acquisitions was approximately $198.3 in cash, 5,458,641 shares of common stock,
the issuance of notes of approximately $3.6 and the assumption of indebtedness
of approximately $90.1. During the year ended December 31, 1999, the Company
acquired several metal processing companies and businesses using the "purchase"
method of accounting. The aggregate consideration paid in connection with these
acquisitions was approximately $78.0 in cash, 317,283 shares of Common Stock,
convertible notes of approximately $4.0 and the assumption of indebtedness of
approximately $12.9. During the year ended December 31, 2000, the Company
acquired one metal processing business using the "purchase" method of
accounting. The aggregate consideration paid in connection with this acquisition
was $7.8 in cash and the assumption of $4.5 of liabilities.
The Company has recorded the excess of the purchase price over the
estimated fair value of identifiable assets acquired in the transactions
accounted for using the "purchase" method of accounting as goodwill in the
accompanying consolidated balance sheets.
The following summarized unaudited pro forma financial information adjusts
the historical financial information by assuming the acquisitions completed
during 1999 and 1998 and the issuance of the Notes (as defined in Note 6)
occurred on January 1, 1998. The pre-acquisition results of the 2000 acquisition
are immaterial, as it was completed during the first quarter of 2000;
consequently, pro forma results have not been presented for this acquisition.
Years Ended December 31,
1999 1998
--------- ---------
(unaudited)
Net sales ................................. $ 1,818.4 $ 1,927.0
========= =========
Net income ................................ $ 41.4 $ 54.8
========= =========
Earnings per share ........................ $ 1.09 $ 1.42
========= =========
Earnings per share-- assuming dilution .... $ 1.08 $ 1.40
========= =========
Pro forma adjustments included in the amounts above primarily relate to (a) the
reduction in certain related party lease expenses and management compensation,
which has been agreed to prospectively; (b) the amortization of goodwill
recorded over a forty-year estimated life, plus additional depreciation expense
due to the allocation of a portion of the excess purchase price to property and
equipment; (c) the assumed reductions in interest expense due to the refinancing
of the outstanding indebtedness in conjunction with the acquisitions, offset by
an assumed increase in interest expense incurred in connection with financing
the acquisitions; (d) a charge eliminating the gains recorded as historical LIFO
adjustments to cost of sales as a result of the restatement of base year LIFO
costs to the appropriate replacement costs, as if the acquisitions occurred on
January 1, 1998; (e) certain other nonrecurring expenses with respect to the
acquisitions, such as expenses associated with compensation plans which were
terminated in conjunction with the respective acquisitions;
35
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
2. Business Combinations (Continued)
(f) the incremental interest expense and amortization of deferred financing
costs incurred as a result of the issuance of the Notes and the Credit Facility
(as defined in Note 6), net of the repayment of outstanding indebtedness of the
Company and (g) the adjustment to the provision for federal and state income
taxes for all entities being combined relating to the entries noted above and as
if all entities were C Corporations.
The pro forma results presented above are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the purchased companies been combined at the beginning of the
period presented.
3. Inventories
Inventories consist of the following:
December 31,
-----------------
2000 1999
------ ------
Raw materials --
Plates and Shapes ........................... $195.6 $158.6
Flat Rolled ................................. 127.3 122.7
21.7 17.8
------ ------
Building Products ........................... 344.6 299.1
------ ------
Total raw materials
Work-in-process and finished goods --
Plates and Shapes ........................... 1.9 2.9
Flat Rolled ................................. 32.6 22.8
Building Products ........................... 23.1 25.7
------ ------
Total work-in-process and finished goods 57.6 51.4
------ ------
Less-- LIFO reserve ................................. -- --
Total .................................. $402.2 $350.5
====== ======
The replacement cost of the Company's inventory as of December 31, 2000
and 1999 approximated the historical cost of the inventory computed using the
LIFO method of valuation. If the FIFO method had been used for all inventories,
net income would have been $11.7, $39.3 and $39.4 for the years ended December
31, 2000, 1999, and 1998 respectively.
4. Property and Equipment
Property and equipment consists of the following:
Estimated December 31,
Useful Lives 2000 1999
------------ ---------- ----------
Land .......................... -- $ 14.4 $ 12.5
Building and improvements ..... 5-40 years 96.6 79.2
Machinery and equipment ....... 7-25 years 181.2 147.4
Automobiles and trucks ........ 3-12 years 10.0 9.7
Construction in progress ...... -- 4.6 16.7
---------- ----------
306.8 265.5
Less-- Accumulated depreciation (57.5) (42.5)
---------- ----------
Total .................. $ 249.3 $ 223.0
========== ==========
36
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
4. Property and Equipment (Continued)
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $17.8, $13.9 and $10.5, respectively.
5. Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
---------------------
2000 1999
-------- --------
Accrued salaries and employee benefits ......... $ 12.1 $ 13.3
Accrued interest ............................... 8.8 8.2
Accrued taxes, other than income ............... 4.7 3.7
Accrued integration ............................ 4.4 7.5
Accrued insurance .............................. 3.0 2.7
Accrued escrow ................................. 2.0 2.0
Accrued profit sharing ......................... 1.2 1.5
Accrued dividends .............................. 1.1 --
Accrued professional fees ...................... .6 .6
Other .......................................... 3.7 9.4
-------- --------
Total ................................... $ 41.6 $ 48.9
======== ========
6. Long-Term Debt
Long-term debt consists of the following:
December 31,
---------------------
2000 1999
-------- --------
Borrowings under the Former Credit Facility .... $263.0 $196.0
8 5/8% Senior Subordinated Notes ............... 200.0 200.0
Various issues of Industrial Revenue Bonds ..... 22.3 24.3
Obligations under capital leases and other ..... 7.7 20.5
------ ------
493.0 440.8
Less-- Current portion ......................... (3.1) (6.1)
------ ------
Total ................................... $489.9 $434.7
====== ======
The weighted average interest rates under the Former Credit Facility for
the years ended December 31, 2000, 1999 and 1998 were 8.04%, 7.10% and 7.15%,
respectively. Scheduled maturities of long-term debt for the years ending
December 31 which reflect the terms of the New Credit Facility are as follows:
2001 -- $3.1; 2002 -- $4.3; 2003 -- $5.9; 2004 -- $265.5; 2005 -- $2.3;
thereafter -- $211.9.
Borrowings Under the Credit Facility
On March 12, 2001, the Company entered into two new financing agreements
with Bank of America and PNC Bank. Collectively, the agreements are referred to
as the "New Credit Facility". The New Credit Facility is for a period of three
years, represents $450.0 in financing, and replaced the former credit facility,
("Former Credit Facility") which consisted of a $300.0 revolving credit facility
and a $100.0 accounts receivable
37
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
6. Long-Term Debt (Continued)
securitization facility. The New Credit Facility is comprised of two loans, a
revolving credit facility providing up to $350.0 in borrowings and a $100.0 loan
to a wholly-owned and unrestricted subsidiary of the Company secured solely by
accounts receivable. The New Credit Facility will be secured by all of the
Company's receivables (not otherwise pledged under the accounts receivable
facility), inventories, and property and equipment. Borrowings under the New
Credit Facility are limited to the lesser of a borrowing base, comprised of
eligible receivables and inventories, or $450.0 in the aggregate.
The New Credit Facility matures in March 2004, bears interest at the
bank's prime rate or LIBOR, at Metals USA's option, plus an applicable margin
based on a ratio of EBITDA (as defined and adjusted) to cash interest expense
(the "Fixed Charge Coverage Ratio"). A commitment fee is payable on any unused
portion of the New Credit Facility. The commitment fee varies between 1/2% and
1/4% per annum, based on the Fixed Charge Coverage Ratio. The Company will use
the New Credit Facility to initially repay the borrowings under the Former
Credit Facility and thereafter to finance its working capital requirements, to
make capital expenditures, fund acquisitions including the refinancing of the
debt of the companies acquired and for general corporate purposes. Borrowings
under the New Credit Facility are guaranteed by each of the Company's restricted
subsidiaries (as defined under the Notes below).
The New Credit Facility requires the Company to comply with various
customary affirmative, negative and subjective covenants, the most significant
of which are as follows: (i) the maintenance of certain financial ratios and
borrowing base availability, (ii) restrictions on additional indebtedness, (iii)
restrictions on liens, guarantees and quarterly dividends, (iv) obtaining the
lenders' consent with respect to certain individual acquisitions, and (v)
maintenance of a specified level of consolidated tangible net worth. The New
Credit Facility allows for the payment of up to $1.1 million of dividends in any
fiscal quarter provided that availability is greater than $45.0 million. At
March 14, 2001, the Company had $1.1 available for the payment of dividends.
Concurrent with executing the New Credit Facility, the Company entered
into two interest rate swap agreements designed as a partial hedge to the
Company's variable rate borrowings under the New Credit Facility. The purpose of
these swap agreements is to fix interest rates on a portion of its borrowings
under the New Credit Facility, thereby reducing exposure to interest rate
fluctuations. At March 14, 2001, the Company had interest rate swap agreements
with a notional amount of $100.0 compared to the total borrowings under the New
Credit Facility of $327.9. Under these agreements, the Company will pay the
counterparties interest at a weighted average fixed rate of 5.48% and the
counterparties will pay the Company interest at a variable rate equal to LIBOR.
The weighted average LIBOR rate applicable to these agreements was 5.15% at
March 14, 2001. The notional amounts do not represent amounts exchanged by the
parties, and thus are not a measure of exposure of the Company. The weighted
average variable rates are subject to change over time based on fluctuations in
the ninety-day LIBOR rate. The agreements expire on March 14, 2004.
Neither the Company nor the counterparties, which are prominent financial
institutions, are required to collateralize their respective obligations under
these agreements. The Company is exposed to loss if one or both of the
counterparties default. At March 14, 2001, the Company had no exposure to credit
loss on the interest rate swaps. The Company does not believe that any
reasonably likely change in interest rates would have a material adverse effect
on the financial position, results of operations or cash flows of the Company.
The Company entered into two swap agreements in connection with its Former
Credit Facility for an aggregate notional amount of $125.0. These swaps expired
during the fourth quarter of 2000.
38
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
6. Long Term Debt (Continued)
In connection with the establishment of the New Credit Facility, the
Company expects to incur fees and expenses of about $6-$7 million, which will be
amortized over the three year term of the facility. Further, unamortized costs
associated with the Former Credit Facility in the amount of $2.6 million will be
written off during the first quarter of 2001.
Accounts Receivable Securitization Facility
As part of the Former Credit Facility, in January 1999, the Company
entered into a three-year agreement (the "Receivable Securitization Facility")
to sell, on a revolving basis, through its wholly-owned subsidiary, Metals
Receivables Corporation ("MRC"), an undivided interest in a designated pool of
its trade accounts receivable to a commercial bank ("Purchaser"). The maximum
undivided interest in MRC's receivable portfolio that may be purchased pursuant
to this agreement is $100.0. At December 31, 2000, the Company had received
$100.0 from this facility. The Company, as agent for Purchaser, retained
collection and administrative responsibilities for the participating interests
sold. As collections reduced the receivables included in MRC's receivable
portfolio, the Company could sell additional undivided interests in new
receivables to the Purchaser. The amount of the undivided interest in MRC's
receivable portfolio sold changed monthly depending upon the level of defined
eligible receivables available for sale each month adjusted by certain defined
ratios. The unpurchased portion of the MRC receivable portfolio was a restricted
asset and effectively collateral for the benefit of the Purchaser. At December
31, 2000 and 1999, the unpurchased portion of the MRC receivable portfolio was
$48.3 and $37.2, respectively. Expense attributable to the Receivable
Securitization Facility for the years ended December 31, 2000 and 1999, was $7.2
and $4.9, respectively, and is included in interest and securitization expense
on the consolidated statements of operations. The Receivable Securitization
Facility was terminated with the execution of the New Credit Facility.
8 5/8% Senior Subordinated Notes
On February 11, 1998, the Company completed the sale of $200.0 aggregate
principal amount of the Company's 8 5/8% Senior Subordinated Notes due 2008 (the
"Notes"). The Company received $194.5 of net cash proceeds (before expenses of
$0.8 at closing). The Company used $179.3 of such proceeds to repay all the
borrowings outstanding under the credit facility which existed at that time.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at the following redemption prices: 2003 --
104.313%; 2004 -- 102.875%; 2005 -- 101.438%; thereafter -- 100.00%, together
with accrued and unpaid interest to the date of redemption. The Notes are
guaranteed by substantially all of the Company's current and future
subsidiaries. Additionally, the indenture governing the Notes contains customary
restrictions relating to additional indebtedness, liens, transactions with
affiliates, asset sales, investments, restricted payments and mergers and
acquisitions of subsidiaries. The Notes are subordinate to borrowings under the
New Credit Facility and will rank pari passu in right of payment with all other
future subordinated debt of the Company and will rank senior to other
indebtedness that expressly provides that it is subordinated in right of payment
to the Notes.
39
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
6. Long Term Debt (Continued)
Various Issues of Industrial Revenue Bonds
The Industrial Revenue Bonds (the "IRBs") are payable in installments
ranging from monthly to annual with variable interest ranging from 5.0% to 7.33%
per annum at December 31, 2000 and mature from July 1, 2004 to May 1, 2023. The
IRBs are secured by real estate and equipment acquired with proceeds from these
bonds with a net book value of $29.8 at December 31, 2000. The IRBs place
various restrictions on certain of the Company's subsidiaries, including but not
limited to maintenance of required insurance coverage, maintenance of certain
financial ratios, limits on capital expenditures and maintenance of tangible net
worth and are supported by letters of credit.
7. Income Taxes
The components of the provision for income taxes are as follows:
Years Ended December 31,
-------------------------------------
2000 1999 1998
--------- --------- ---------
Federal
Current ....................................... $ 7.7 $ 16.4 $ 21.4
Deferred ...................................... 2.1 7.7 3.1
--------- --------- ---------
9.8 24.1 24.5
State--
Current ....................................... .6 1.2 1.3
Deferred ...................................... .4 2.2 1.2
--------- --------- ---------
1.0 3.4 2.5
Foreign--
Current ....................................... -- -- --
Deferred ...................................... -- -- .5
--------- --------- ---------
Total provision ............................. $ 10.8 $ 27.5 $ 27.5
========= ========= =========
The provision for income taxes differs from an amount computed at the statutory
rates as follows:
Years Ended December 31,
-------------------------------------
2000 1999 1998
--------- --------- ---------
Federal income tax at statutory rates ............... $ 7.9 $ 23.6 $ 23.6
State income taxes, net of federal income tax benefit .5 2.2 2.2
Nondeductible expenses:
Stock compensation ........................... -- -- .3
Amortization of goodwill ..................... 1.6 1.5 1.4
Other ........................................ .8 .2 --
--------- --------- ---------
$ 10.8 $ 27.5 $ 27.5
========= ========= =========
40
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
7. Income Taxes (Continued)
The significant items giving rise to the deferred tax assets (liabilities) are
as follows:
December 31,
------------------------
2000 1999
--------- ---------
Deferred tax assets--
Accounts receivable ...................... $ 1.9 $ .8
Inventories .............................. .9 .3
Accrued liabilities ...................... 3.4 3.8
Net operating loss carryforward .......... 1.1 1.4
Deferred compensation and other .......... -- .1
--------- ---------
Total deferred tax assets ........... 7.3 6.4
--------- ---------
Deferred tax liabilities--
Property and equipment ................... (30.7) (26.1)
Foreign investments ...................... (1.6) (1.7)
Other .................................... (1.1) (1.1)
--------- ---------
Total deferred tax liabilities ...... (33.4) (28.9)
Valuation allowance ............................. (.6) (.6)
--------- ---------
Net deferred tax assets (liabilities) $ (26.7) $ (23.1)
========== ==========
A subsidiary of the Company has a net operating loss carryforward, which
is available to reduce the Company's future federal income taxes payable, and
expires in 2005. A valuation allowance has been established to offset the
portion of the deferred tax asset related to the loss carryforward expected to
expire before utilization and for other deferred tax assets which the Company
does not expect to realize through future operations.
8. Stockholders' Equity
Common Stock and Preferred Stock
During 2000, the Company declared four quarterly dividends of $0.03 per
share. Three of these quarterly dividends were paid during 2000. The fourth
quarterly dividend was declared on November 13, 2000 and was paid on January 11,
2001 to stockholders of record on November 17, 2000.
Restricted Common Stock
Notre Capital Ventures II, L.L.C. held 3,122,914 shares of restricted
voting common stock ("Restricted Common Stock") prior to the Company's initial
public offering. The holders of Restricted Common Stock were entitled to elect
one member of Metals USA's Board of Directors and to .55 of one vote for each
share held on all other matters on which they were entitled to vote.
Metals USA was permitted, by its Certificate of Incorporation, to convert
any outstanding shares of Restricted Common Stock into shares of Common Stock in
the event 80% or more of the outstanding shares of Restricted Common Stock have
been converted into shares of Common Stock. As of December 31, 2000, 2,776,998
shares or 90% of the original total had been converted into Common Stock. In
February 2001, the Company elected to convert all remaining Restricted Common
Stock into shares of Common Stock of the Company.
41
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
8. Stockholders' Equity (Continued)
Treasury Stock
On April 22, 1999, the Company announced that the Board of Directors had
approved the use of up to $25.0 million to repurchase shares of the Company's
Common Stock. The shares were purchased, from time to time, in open market
transactions. During the year ended December 31, 1999, the Company had
repurchased 461,450 shares at an average price of $9.77 per share, including
fees and commissions. During 2000, the Company repurchased an additional
1,544,993 shares at an average price of $7.47 per share, including fees and
commissions. Also in 2000, the Company retired all of its Treasury Stock
(2,006,443 shares) thereby reducing the number of outstanding shares by a like
amount. The Company does not anticipate continuing this repurchase program in
2001.
9. Stock Based Compensation
Long-Term Incentive Plan
In April 1997, Metals USA's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options ("NQSOs"), stock
appreciation rights, restricted or deferred stock, dividend equivalents and
other incentive awards to officers, key employees and consultants to Metals USA.
The number of shares authorized and reserved for issuance under the Plan is
limited to 13% of the aggregate number of shares of Common Stock outstanding.
These options will vest at the rate of 20% per year, commencing on the first
anniversary of date of grant and will expire ten years from the date of grant or
three months following termination of employment.
Non-Employee Directors' Stock Plan
Metals USA's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by Metals USA's
stockholders in April 1997, provides for (i) the automatic grant to each
non-employee director serving at the consummation of the IPO of an option to
purchase 10,000 shares, (ii) the automatic grant to each non-employee director
of an option to purchase 10,000 shares upon such person's initial election as a
director and (iii) an automatic annual grant at each annual meeting of
stockholders thereafter of an option to purchase 5,000 shares to each
non-employee director at which meeting such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and are immediately vested and expire on the earlier of ten years from the
date of grant or one year after termination of service as a director. The
Directors' Plan also permits non-employee directors to elect to receive, in lieu
of cash directors' fees, shares or credits representing "deferred shares" at
future settlement dates, as selected by the director. The number of shares or
deferred shares received will equal the number of shares of Common Stock which,
at the date the fees would otherwise be payable, will have an aggregate fair
market value equal to the amount of such fees. Through December 31, 2000, a
total of 130,000 options have been granted under this plan and none have been
cancelled or exercised.
42
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
9. Stock Based Compensation (Continued)
The following is a summary of stock option activity:
Weighted
Average
"Fair Value" Options for
per Share Weighted Shares of
of Options Average Price Common
Granted per Share Stock
---------- ------------- ---------
Balance, January 1, 1998 ............... 3,254,258
Granted to directors ................... 13.08 19.25 20,000
Granted ................................ 10.26 15.50 843,464
Exercised .............................. 6.30 10.00 (25,392)
Canceled or expired .................... 7.16 11.66 (123,680)
----------
Balance, December 31, 1998 ............. 3,968,650
Granted to directors ................... 6.56 10.81 40,000
Granted ................................ 5.71 9.49 701,500
Exercised .............................. 6.55 8.45 (31,539)
Canceled or expired .................... 9.39 14.30 (305,199)
----------
Balance, December 31, 1999 ............. 4,373,412
Granted to directors ................... 4.17 7.06 30,000
Granted ................................ 4.16 7.76 115,000
Canceled or expired .................... 8.12 11.51 (538,568)
----------
Balance, December 31, 2000 ............. 3,979,844
==========
At December 31, 2000, exercisable options for shares of Common Stock were
2,140,001 at a weighted average price of $11.48 per share.
The Company uses the Black-Scholes model to calculate the estimated "fair
value" of stock options and similar awards. The model requires the use of a
number of subjective assumptions including: (i) risk free rate of return, (ii)
expected price volatility of the Common Stock, (iii) expected dividend yield and
(iv) estimated life of the option. Principal assumptions used in estimating the
"fair value" of the Company's stock options using the Black-Scholes model were
as follows:
December 31,
-------------------
2000 1999
---- ----
Risk free rate of return ......................... 6.50% 6.21%
Expected price volatility ........................ 49.45% 48.06%
Expected dividend yield .......................... 0.50% --
Expected life of the option (in years) ........... 7.5 7.5
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date, consistent
with the methodology prescribed under the SFAS No. 123, the Company's net income
and earnings per share would have been reduced by the amortization of the
estimated fair value of stock options over the applicable vesting period of such
awards. The following pro forma disclosures may not be
43
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
9. Stock Based Compensation (Continued)
representative of similar future disclosures because: (i) additional
options may be granted in future years and (ii) the computations used to
estimate the "fair value" of the stock options are subject to significant
subjective assumptions, any one or all of which may differ in material respects
from actual amounts.
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Net income as reported ............................................... $ 11.7 $ 39.8 $ 40.0
Estimated "fair value" of stock options vesting during the period, net
of federal income tax benefit ...................................... (3.1) (3.3) (3.4)
-------- -------- --------
Adjusted net income .................................................. $ 8.6 36.5 $ 36.6
======== ======== ========
Adjusted earnings per share .......................................... $ .23 $ .96 $ 1.00
======== ======== ========
Adjusted earnings per share -- assuming dilution ..................... $ .23 $ .95 $ .98
======== ======== ========
Number of common shares used in the per share calculations:
Adjusted earnings per share ........................................ 36.8 38.1 36.7
======== ======== ========
Adjusted earnings per share-- assuming dilution .................... 37.0 38.4 37.3
======== ======== ========
10. Integration Charge
On September 8, 1999, the Company announced a comprehensive plan to reduce
operating costs and improve its operational efficiency by fully integrating
certain operations within a geographic area and consolidating certain
administrative and support functions. The Company recorded a charge to
operations of $9.4 in respect of this plan (the "Integration Charge"). The
principal components of the Integration Charge are $3.3 for termination of
certain employment contracts, $2.1 for severance costs attributable to the
consolidation of administrative and support functions, and $4.0 for the costs of
combining five processing facilities into others within the same geographic
region. These changes affected less than 5% of the Company's workforce. The
following schedule sets forth by segment the Integration Charge recorded in the
third quarter of 1999 and costs paid through December 31, 2000.
Integration Costs
Charge Paid
----------- ------
Plates and Shapes .................. $ 5.6 $ 3.5
Flat Rolled ........................ 1.1 .8
Building Products .................. 2.7 .7
------ ------
Total ......................... $ 9.4 $ 5.0
====== ======
The Company expects to pay between approximately $0.5 and $1.5 during each
of the next four quarterly reporting periods with respect to the remaining costs
and to complete the initial plan for the integration and consolidation of
certain operations and administrative functions by December 31, 2001. Although
the foregoing estimates with respect to both costs and timing reflect the best
information available to management, there can be no assurance that such costs
will not exceed current expectations or that the timing of the facility
integration activities will not be delayed. In aggregate, adjustments for
estimates for costs incurred through December 31, 2000 were less than $0.1.
Approximately $1.0 of the costs included in costs paid result from negotiated
settlements with respect to certain employment contracts that are to be paid
over a three to five year period. These amounts were reclassified from the
Integration Charge to other accrued liabilities at December 31, 1999.
44
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
11. Segment and Related Information
During 1998, the Company organized into four product groups: Plates and
Shapes, Flat Rolled, Specialty Metals and Building Products. In early 2001, the
Company announced a change in the organization to reduce the number of product
groups to three. The Flat Rolled Group will expand to include all flat rolled
processing operations of specialty metals and carbon steel in a single business
unit. Similarly, the non-flat rolled operations of the former Specialty Metals
Group will be included in an expanded Plates and Shapes Group. Each segment
processes and distributes distinct products for different customer bases and is
managed by a product segment team focused on improving and expanding segment
operations. The following descriptions reflect the reorganization of the product
groups.
- - Plates and Shapes consists of fifty-two facilities that maintain an
inventory focusing on carbon products such as structural plate, beams,
bars and tubing as well as many specialty metals products including
stainless steel, ductile iron, brass, copper, aluminum, magnesium and
titanium. This segment provides processing services to their customers,
such as cutting, cambering/leveling, punching, bending, shearing,
cut-to-length and T-splitting.
- - Flat Rolled consists of twenty-nine facilities that maintain an inventory
of cold rolled and hot rolled steel products and various nonferrous flat
rolled products including aluminum, stainless steel, copper and brass.
This segment provides processing services for their customers such as
slitting, precision blanking, leveling, cut-to-length, laser cutting,
punching, bending and shearing.
- - Building Products consists of sixty-three facilities that produce and
distribute aluminum and steel building products consisting of covered
canopies and walkways, awnings, sunrooms, solariums and other products
primarily for the commercial and residential building products industries.
The accounting policies of the reportable segments are the same as those
described in Note 1 of "Notes to Consolidated Financial Statements." The Company
evaluates the performance of its operating segments based on operating income.
45
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
11. Segment and Related Information (Continued)
The following table shows summarized financial information concerning the
Company's reportable segments.
As of and for the years ended December 31,
--------------------------------------------------------------
Corporate,
Plates and Building Eliminations
Shapes Flat Rolled Products And Other Total
---------- ----------- -------- ------------ --------
2000:
Net sales ................... $ 965.1 $ 937.3 $ 170.2 $ (51.0) $2,021.6
Operating income (loss) ..... 49.1 27.0 10.0 (14.7) 71.4
Total assets ................ 409.8 318.0 122.1 254.9 1,104.8
Capital expenditures ........ 14.0 12.7 6.3 4.3 37.3
Depreciation and amortization 10.9 7.1 2.9 5.1 26.0
1999:
Net sales ................... $ 861.2 $ 794.0 $ 126.7 $ (36.5) $1,745.4
Operating income (loss) ..... 59.0 48.0 10.3 (10.7) 106.6
Total assets ................ 396.7 292.7 118.0 241.9 1,049.3
Capital expenditures ........ 17.5 14.2 2.6 .9 35.2
Depreciation and amortization 9.0 5.8 2.0 4.4 21.2
1998:
Net sales ................... $ 782.7 $ 632.8 $ 93.4 $ (10.1) $1,498.8
Operating income (loss) ..... 61.5 37.7 9.3 (11.7) 96.8
Total assets ................ 453.5 297.5 82.7 192.7 1,026.4
Capital expenditures ........ 13.2 10.2 1.7 .2 25.3
Depreciation and amortization 6.5 4.3 1.4 4.2 16.4
The amounts shown as an operating loss under the column heading
"Corporate, Eliminations and Other" consist primarily of general and
administrative costs that are not allocated to the segments and the amortization
of goodwill associated with certain of the Company's acquisitions. Assets not
specifically associated with a specific segment consist primarily of goodwill.
The reconciliation from total operating income to the Company's income
before income taxes is shown on the accompanying consolidated statement of
operations.
The Company's areas of operations are principally in the United States. No
single foreign country or geographic area is significant to the consolidated
operations. Foreign sales represent less than 1% of consolidated sales and the
Company has no long-lived assets in any foreign country.
The Company has a broad customer base within the United States with no
single customer being significant to consolidated operations.
46
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
12. Employee Benefit Plans
Profit-Sharing Plans
The Company established the Metals USA, Inc. 401(k) Plan on June 1, 1998
to provide a standardized defined contributions savings plan (the "Plan") for
employees. Participants are eligible for the Plan after completing six full
calendar months of service. Participants' employer contributions vest at varying
rates, ranging from full vesting upon participation to vesting that begins after
one year of service and are fully vested after four years. The Company's
contributions consist of a matching contribution of 50%, up to 6% of the
eligible employee's contribution. The Plan allows the employee to contribute up
to 15% of their eligible compensation.
The Company established the Metals USA, Inc. Union 401(k) Plan on October
1, 1998 to provide a standard defined contributions savings plan for all
employees covered under the terms of a collective bargaining agreement (the
"Union Plan"). The employer is not obligated by the Union Plan to make
contributions, unless required by the operative collective bargaining agreement.
These contributions will generally vest from four to seven years, as specified
by the terms of the applicable collective bargaining agreement. The Union Plan
allows the employee to contribute up to 15% of their eligible compensation.
Certain subsidiaries provided various defined contributions plans for
their employees prior to being acquired by Metals USA, Inc. Contributions for
the profit-sharing portion of these plans, prior to the inception of the Plan
and the Union Plan, were at the discretion of the individual subsidiaries' board
of directors. The benefit plans of acquired companies are merged into the Plan
as soon as practicable.
The aggregate contributions to the Plans were $3.9, $3.4, and $2.8 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Leveraged ESOP Arrangement
Under the provisions of an employee stock ownership plan ("ESOP") and its
related trust, Jeffreys Steel Company, Inc. ("Jeffreys"), a 1997 acquisition
accounted for as a pooling transaction, made annual contributions to the ESOP
which were invested in stock of Jeffreys and other qualifying securities for the
benefit of Jeffreys' employees. The ESOP provided for Jeffreys' purchases of
employee shares to be paid in cash and with the issuance of a note payable.
Effective September 26, 1997, the participation was frozen. Concurrent with the
merger with Metals USA, ESOP shares were exchanged for shares of Metals USA
common stock. The following reflects the equivalent shares of Metals USA common
stock that were issued in connection with the acquisition of Jeffreys.
Jeffreys' ESOP held 434,616 shares of stock prior to the purchase of
735,384 shares of outstanding stock from a majority stockholder for $5.31 per
share. The ESOP borrowed the funds to purchase such stock and Jeffreys
guaranteed the repayment of this loan. Jeffreys repaid this loan, plus interest,
through deductible contributions to the plan. As Jeffreys made contributions to
the plan, which reduced the principal on the note, the plan released the
corresponding shares related to the reduction in the note principal. At the
point when these shares were no longer specifically secured by the note payable,
they were allocated to the individual participants of the plan and considered
earned by those employees at that time. Jeffreys accounted for its ESOP in
accordance with Statement of Position 93-6 ("SOP 93-6"), Employers' Accounting
for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP was
recorded as long-term debt and the shares pledged
47
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
12. Employee Benefit Plans (Continued)
as collateral were reported as unearned compensation. As shares were released
from collateral, Jeffreys reported compensation expense equal to estimated
market price of the shares at that time. ESOP share compensation expense was
$2.6 for the year ended December 31, 1998. Since the obligation was secured by
the shares purchased and the note was guaranteed by Jeffreys, all amounts
relating to this transaction were considered unearned compensation of the
employees until such time as the note was repaid and the corresponding shares
were released to the individual participants of the plan. With the termination
of the ESOP in August 1998, subsequent to the payment of the note to Jeffreys
and the distribution of the ESOP shares to the individual participants, all
unearned compensation was charged to expense in 1998.
In accordance with SOP 93-6, additional paid-in capital was adjusted
whenever the market value of the shares released was more or less than the cost
of the shares released. The increase in additional paid-in capital attributable
to this difference in market value and cost was $2.1 for the year ended December
31, 1998.
13. Supplemental Cash Flow Information
Years Ended December 31,
---------------------------
2000 1999 1998
------ ------ ------
Supplemental cash flow information:
Cash paid for interest and securitization expense $ 47.9 $ 38.0 $ 23.7
Cash paid for income taxes ...................... 8.5 24.3 29.7
Non-cash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired ................... $ 12.3 $124.2 $465.3
Consideration given:
Cash paid ..................................... 7.8 77.9 198.3
Stock issued .................................. -- 2.1 73.5
Notes issued .................................. -- 4.0 3.6
------ ------ ------
Liabilities assumed ............................. $ 4.5 $ 40.2 $189.9
====== ====== ======
14. Commitments and Contingencies
Operating Lease Agreements
The Company's minimum lease obligations under certain long-term
non-cancelable lease agreements for office space, warehouse space and equipment
are as follows: 2001 -- $20.9; 2002 -- $17.8; 2003 -- $14.6; 2004 -- $12.6; 2005
- -- $10.9; thereafter -- $47.6.
The Company recorded approximately $19.5, $15.8, and $10.1 in rent expense
during the years ended December 31, 2000, 1999 and 1998, respectively, under
operating leases. Certain of these leases are with affiliated individuals and
companies (see Note 15).
48
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except share and per share amounts)
14. Commitments and Contingencies (Continued)
Contingencies
The Company and its subsidiaries are involved in a variety of claims,
lawsuits and other disputes arising in the ordinary course of business. The
Company believes the resolution of these matters and the incurrence of their
related costs and expenses should not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
15. Related-Party Transactions
Transactions with directors, executive officers, principal shareholders or
affiliates of the Company must be at terms that are no less favorable to the
Company than those available from third parties and must be approved in advance
by a majority of disinterested members of the Board of Directors.
In connection with the Mergers and certain of the subsequent acquisitions,
subsidiaries of the Company have entered into a number of lease arrangements for
facilities and equipment. These lease arrangements are for periods ranging from
10 to 20 years. Payments under these lease arrangements with respect to years
ended December 31, 2000, 1999 and 1998 were $1.8, $3.2, and $3.1, respectively.
Future commitments in respect of these leases are included in the schedule of
minimum lease payments in Note 14.
16. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the years ended December
31, 2000, 1999 and 1998 is as follows:
Three Months Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2000:
Net sales ................................ $ 523.8 $ 548.3 $ 510.1 $ 439.4
Operating income ......................... 30.2 27.5 14.6 (0.9)
Net income ............................... 11.2 9.5 .6 (9.6)
Earnings per share-- assuming dilution (1) .30 .26 .02 (.26)
1999:
Net sales ................................ $ 422.4 $ 435.7 $ 444.0 $ 443.3
Operating income ......................... 27.6 29.1 21.2 28.7
Net income ............................... 10.7 11.8 6.6 10.7
Earnings per share-- assuming dilution (1) .28 .31 .17 .28
1998:
Net sales ................................ $ 278.5 $ 377.2 $ 438.4 $ 404.7
Operating income ......................... 16.8 25.3 27.2 27.5
Net income ............................... 7.2 12.2 10.4 10.2
Earnings per share-- assuming dilution (1) .21 .32 .27 .27
- ----------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.
49
METALS USA, INC.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Information required under Part III (Items 10, 11, 12 and 13) has been
omitted from this report, since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14A which involves the
election of directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Financial Statements
1. Financial Statements (included under Item 8):
The Index to the Financial Statements is included on page 25 of this
report and is incorporated herein by reference.
2. Financial Statement Schedules:
Report of Independent Public Accountants on Supplementary Data.
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted since the required information
is not significant or is included in the Consolidated Financial
Statements or notes thereto or is not applicable.
(b) Reports on Form 8-K
On February 9, 2001, the Company filed a report on Form 8-K relative to a
commitment letter for the New Financing Facility and preliminary financial
results for the quarter ended December 31, 2000.
(c) Exhibits
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 55), which index is incorporated herein
by reference.
50
METALS USA, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY DATA
To Metals USA, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Metals USA, Inc. and
subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated March 14, 2001, in which we expressed an unqualified
opinion. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation and Qualifying Accounts
Schedule (Schedule II) listed in the index at Item 14(a) is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This information has been subjected
to the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 2001
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Balance at Amount Utilization of
Beginning Charged to reserve (net Balance at
Description of Year Expense of recoveries) Other End of Year
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Allowance for doubtful accounts $ 6.2 $ 4.1 $ (2.9) $ -- $ 7.4
Integration Charge 7.5 -- (3.1) -- 4.4
Year Ended December 31, 1999
Allowance for doubtful accounts $ 7.1 $ 1.4 $ (2.9) $ .6(1) $ 6.2
Integration Charge -- 9.4 (.9) (1.0)(2) 7.5
Year Ended December 31, 1998
Allowance for doubtful accounts 3.6 1.7 (.5) 2.3(1) 7.1
(1) Represents aggregate increase in the beginning balances arising from
acquired businesses during the year.
(2) Reclassifications resulting from negotiated settlements with respect to
certain employment contracts that are to be paid over a three to five year
period. These amounts were reclassified from the Integration Charge
accrual to other accrued liabilities at December 31, 1999.
51
METALS USA, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 29, 2001.
METALS USA, INC.
By: /s/ J. MICHAEL KIRKSEY
------------------------------------------
J. Michael Kirksey, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2001.
Signature Title
--------- -----
/s/ J. MICHAEL KIRKSEY Chairman of the Board,
- -------------------------------------- Chief Executive Officer
J. Michael Kirksey and Director
/s/ TERRY L. FREEMAN Vice President and
- -------------------------------------- Chief Accounting Officer
Terry L. Freeman
STEVEN S. HARTER* Director
ARNOLD W. BRADBURD* Director
T. WILLIAM PORTER* Director
RICHARD H. KRISTINIK* Director
TOMMY E. KNIGHT* Director
FRANKLIN MYERS* Director
WILLIAM L. TRANSIER* Director
*By: /s/ J. MICHAEL KIRKSEY Director
- --------------------------------------
J. Michael Kirksey, Attorney-in-Fact
52
METALS USA, INC.
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 -- Amended and Restated Certificate of Incorporation of Metals USA, Inc.
(the "Company"), as amended, incorporated by reference to the
Company's registration statement on Form S-1, Registration No.
333-26601 dated June 17, 1997.
3.2 -- Bylaws of the Company, as amended, incorporated by reference to the
Company's registration statement on Form S-1, Registration No.
333-26601 dated May 7, 1997.
4.1 -- Form of certificate evidencing ownership of Common Stock of the
Company, incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated July 9, 1997.
4.2 -- Indenture, dated February 11, 1998, by and among the Company as issuer
and the Guarantors named therein, and U.S. Trust Company of
California, N.A., as Trustee regarding the Company's 8 5/8% Senior
Subordinated Notes due 2008, incorporated by reference to the
Company's registration statement on Form S-1, Registration No.
333-35575 dated February 20, 1998.
10.1 -- The Company's 1997 Long-Term Incentive Plan, incorporated by reference
to the Company's registration statement on Form S-1, Registration No.
333-26601 dated May 7, 1997.
10.2 -- The Company's 1997 Non-Employee Directors' Stock Plan, incorporated by
reference to the Company's registration statement on Form S-1,
Registration No. 333-26601 dated May 7, 1997.
10.3 -- Form of Employment Agreement between the Company and J. Michael
Kirksey, incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated July 9, 1997.
10.4 -- Form of Employment Agreement between the Company and John A. Hageman,
incorporated by reference to the Company's registration statement on
Form S-1, Registration No. 333-26601 dated July 9, 1997.
10.5 -- Form of Employment Agreement between the Company and Terry L. Freeman,
incorporated by reference to the Company's registration statement on
Form S-1, Registration No. 333-26601 dated July 9, 1997.
10.8 -- Form of Founders' Employment Agreement between Steel Service Systems,
Inc. and Craig R. Doveala, incorporated by reference to the Company's
registration statement on Form S-1, Registration No. 333-26601 dated
June 17, 1997.
10.10 -- Form of Founders' Employment Agreement between Uni-Steel, Inc. and
Richard A. Singer, incorporated by reference to the Company's
registration statement on Form S-1, Registration No. 333-26601 dated
June 17, 1997.
10.11 -- Form of Founders' Employment Agreement between Williams Steel & Supply
Co., Inc. and Lester G. Peterson, incorporated by reference to the
Company's registration statement on Form S-1, Registration No.
333-26601 dated June 17, 1997.
10.12+ -- Form of Loan and Security Agreement by and among Bank of America, N.A.
as administrative agent and PNC Bank, N.A. as documentation agent and
Metals USA, Inc. and certain subsidiaries, for up to $350.0 million of
aggregate financing dated March 12, 2001, (the "Metals USA Credit
Facility" and together with the Metals Receivable Corporation Credit
Facility, the "New Credit Facility").
53
METALS USA, INC.
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
10.13+ -- Form of Loan and Security Agreement by and among Bank of America, N.A.
as administrative agent and PNC Bank, N.A. as documentation agent and
Metals Receivable Corporation for up to $100.0 million of aggregate
financing dated March 12, 2001, (the "Metals Receivable Corporation
Credit Facility" and together with the Metals USA Credit Facility, the
"New Credit Facility").
21+ -- List of subsidiaries of the Company
23.1+ -- Consent of Arthur Andersen LLP
27+ -- Financial Data Schedule
- ----------------
+ Included with this filing.
54