UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

Commission File Number 1-13123

 

METALS USA, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

 

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 ý   No o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   
Yes o No ý

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS

 

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ý  No o

 

Number of shares of common stock outstanding at November 8, 2004: 20,202,846

 

 

METALS USA, INC. AND SUBSIDIARIES

 

SAFE HARBOR STATEMENT—FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains statements that 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Legal Proceedings”. Such statements can be identified by the use of forward-looking terminology such as “believe,” “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. In addition, readers should refer to “Factors Which May Affect Future Operating Results” included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 for risk factors that may affect future performance.

 

1

 

METALS USA, INC. AND SUBSIDIARIES

 

INDEX

 

PART I. – FINANCIAL INFORMATION
Item 1.		Financial Statements
	Unaudited Consolidated Balance Sheets at September 30, 2004 and
	December 31, 2003
	Unaudited Consolidated Statements of Operations for the three and nine months ended
	September 30, 2004 and 2003
	Unaudited Consolidated Statements of Cash Flows for the nine months ended
	September 30, 2004 and 2003
	Condensed Notes to Unaudited Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of  Operations
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
Item 4.		Controls and Procedures
Item 5.		Other Matters
PART II. – OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.		Exhibits and Reports on Form 8-K
Signature
Certifications

 

2

 

METALS USA, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)

 

		September 30, 2004			December 31, 2003
		(Unaudited)
Assets
Current assets:
Cash		$	12.9		$	11.4
Accounts receivable, net of allowance of $9.3 and $6.9, respectively		199.7			125.0
Inventories		377.5			240.0
Prepaid expenses and other		6.6			8.4
Total current assets		596.7			384.8
Property and equipment, net		33.1			17.6
Other assets, net		3.9			4.8
Total assets		$	633.7		$	407.2
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	75.3		$	48.9
Accrued liabilities		37.3			31.0
Income taxes payable		14.2			1.0
Current portion of long-term debt		3.7			0.5
Total current liabilities		130.5			81.4
Long-term debt, less current portion		207.6			118.2
Other long-term liabilities		7.2			7.0
Total liabilities		345.3			206.6
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 200,000,000 shares authorized; 20,195,845 shares issued and outstanding at September 30, 2004 and 20,154,710 shares issued and outstanding at December 31, 2003		0.2			0.2
Additional paid-in capital		200.0			196.2
Retained earnings		88.2			4.2
Total stockholders’ equity		288.4			200.6
Total liabilities and stockholders’ equity		$	633.7		$	407.2

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3

 

METALS USA, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenues:
Net sales		$	412.6		$	245.1		$	1,115.4		$	713.7
Cost of sales		295.1			184.8			784.7			542.0
Gross profit		117.5			60.3			330.7			171.7
Operating costs and expenses:
Operating and delivery		36.6			32.6			109.7			93.8
Selling, general and administrative		27.8			21.6			79.0			65.2
Depreciation and amortization		0.5			0.2			1.2			0.3
Operating income		52.6			5.9			140.8			12.4
Other (income) expense:
Interest expense		2.1			1.1			5.8			4.4
Other (income) expense, net		(1.2		)	0.1			(1.6		)	(0.2		)
Income before income taxes and discontinued operations		51.7			4.7			136.6			8.2
Provision for income taxes		19.9			1.9			52.6			3.2
Income before discontinued operations		31.8			2.8			84.0			5.0
Discontinued operations, net of taxes		—			—			—			(0.1		)
Net income		$	31.8		$	2.8		$	84.0		$	4.9
Net income per share – basic:
Before discontinued operations		$	1.57		$	.14		$	4.16		$	.25
Discontinued operations		—			—			—			(.01		)
Total		$	1.57		$	.14		$	4.16		$	.24
Net income per share - diluted:
Before discontinued operations		$	1.53		$	.14		$	4.06		$	.25
Discontinued operations		—			—			—			(.01		)
Total		$	1.53		$	.14		$	4.06		$	.24
Number of common shares used in the per share calculations:
Basic		20.2			20.2			20.2			20.2
Diluted		20.8			20.4			20.7			20.3

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

 

METALS USA, INC. AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

		Nine Months Ended September 30,
		2004			2003
Cash flows from operating activities:
Net income		$	84.0		$	4.9
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net loss from discontinued operations		—			0.1
Provision for bad debts		3.5			2.1
Depreciation and amortization		1.2			0.3
Changes in operating assets and liabilities:
Accounts receivable		(78.2		)	(17.3		)
Inventories		(137.5		)	26.5
Prepaid expenses and other		2.7			15.2
Accounts payable and accrued liabilities		32.9			18.5
Income taxes payable		13.2			0.4
Other operating		3.8			2.6
Net cash provided by (used in) continuing operating activities		(74.4		)	53.3
Net cash provided by (used in) discontinued operating activities		—			(0.3		)
Net cash provided by (used in) operating activities		(74.4		)	53.0
Cash flows from investing activities:
Sale of assets		0.5			5.5
Purchases of assets		(13.6		)	(8.8		)
Net cash provided by (used in) investing activities		(13.1		)	(3.3		)
Cash flows from financing activities:
Net borrowings (repayments) on credit facilities		89.3			(43.1		)
Borrowings of long-term debt		0.6			—
Repayments of long-term debt		(0.5		)	(2.5		)
Deferred financing costs		(0.8		)	—
Issuance of common stock		0.4			—
Net cash provided by (used in) financing activities		89.0			(45.6		)
Net increase in cash		1.5			4.1
Cash, beginning of period		11.4			6.3
Cash, end of period		$	12.9		$	10.4

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5

 

METALS USA, INC. AND SUBSIDIARIES

 

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share amounts)

 

1.     Organization and Basis of Presentation

 

Organization

 

We are a leading provider of value-added processed steel, stainless steel, aluminum and specialty metals, as well as manufactured metal components. Historically, about 85% of our revenues are derived from metal service center and distribution activities that are segmented into two groups: Flat Rolled, and Plates and Shapes. We purchase metal from primary producers who generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet specifications provided by end-use customers. Our Flat Rolled Group and Plates and Shapes Group customers are in businesses such as the machining, furniture, transportation equipment, power and process equipment, construction/fabrication, consumer durables and electrical equipment industries, and machinery and equipment manufacturers. The remaining portion of our revenue is derived from the Building Products Group, which principally manufactures and distributes aluminum products related to the residential and commercial construction and home improvement industry. Our Building Products Group customers are distributors and contractors engaged in residential and commercial building projects.

 

Basis of Presentation

 

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.

 

Interim Financial Information ¾ The interim consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in our opinion, are necessary to present fairly the interim consolidated financial information as of and for the periods indicated. All intercompany transactions and balances have been eliminated. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year.

 

Use of Estimates and Assumptions ¾ The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. We review all significant estimates affecting our consolidated financial statements on a recurring basis and record 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.

 

6

 

2.     Earnings Per Share

 

Earnings per Share — Basic 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 — Diluted reflects the potential dilution that would occur if securities and other contracts to issue common stock were exercised or converted into common stock. Unearned stock grants outstanding at September 30, 2004 and 2003 were 34,000 and zero, respectively. There were outstanding options to purchase 911,233 and 840,000 shares of Common Stock as of September 30, 2004 and 2003, respectively.

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2004		2003		2004		2003
		(in millions of shares)
Weighted average shares used in computing income per share – basic		20.2		20.2		20.2		20.2
Effect of dilutive securities:
Stock options		0.6		0.2		0.5		0.1
Weighted average shares used in computing income per share – diluted		20.8		20.4		20.7		20.3

 

3.     Inventories

 

Inventories consist of the following:

 

		September 30, 2004			December 31, 2003
Raw materials ¾
Plates and Shapes		$	176.3		$	103.4
Flat Rolled		124.5			79.0
Building Products		19.1			15.0
Total raw materials		319.9			197.4
Work-in-process and finished goods ¾
Plates and Shapes		—			—
Flat Rolled		29.9			20.2
Building Products		27.7			22.4
Total work-in-process and finished goods		57.6			42.6
Total		$	377.5		$	240.0

 

7

 

4.     Debt

 

Debt consists of the following:

 

		September 30, 2004			December 31, 2003
Borrowings under credit facilities		$	194.5		$	105.2
Industrial Revenue Bond		5.7			5.7
Mortgage Note		6.9			7.1
Obligations under capital leases and other		4.2			0.7
Total debt		211.3			118.7
Less — current portion of debt		3.7			0.5
Total long-term portion of debt		$	207.6		$	118.2

 

The weighted average interest rates under the Company’s credit facilities for the three and nine months ended September 30, 2004 and 2003 were 4.10%, 4.06%, 4.34% and 4.46%, respectively.

 

Revolving Credit Facility

 

On October 31, 2002, we entered into a revolving credit facility with a group of lenders. On March 24, 2004, we executed the second amendment to our revolving credit facility with Bank of America, as agent for the lenders, to expand the size of the facility from $200.0 to $250.0 and to extend the maturity date to October 31, 2006. On November 9, 2004, we again amended our revolving credit facility with Bank of America, as agent for the lenders, to expand the size of the facility from $250.0 to $350.0. Further, this third amendment lowered our borrowing costs, increased our borrowing availability and extended the maturity date to November 9, 2009. The revolving credit facility is secured by all of our receivables, inventories, and intangible property. Borrowings under the revolving credit facility are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $350.0 in the aggregate. The agreement, as amended, limits borrowings on inventory to 175% of eligible accounts receivable, as defined in the loan agreement. As of November 9, 2004, our borrowing availability under the revolving credit facility, as amended, was $121.5.

 

The revolving credit facility bears interest at the bank’s base rate or LIBOR, at our option, plus an applicable margin based on a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA” as defined and adjusted) to cash interest expense (the “fixed charge coverage ratio”). The fixed charge coverage ratio is determined by dividing EBITDA by the sum of net capital expenditures, income taxes paid in cash, dividends, or other preference payments, interest expense paid in cash and scheduled principal reductions on debt. The applicable margin for base rate loans ranges from 0.00% to 0.50%. Prior to the third amendment the LIBOR margin loans ranged from 2.00% to 3.00%. The third amendment lowered the LIBOR margins to a range from 1.50% to 2.50%. These marginal rates vary with our financial performance as measured by the fixed charge coverage ratio. Additionally, the third amendment provides for a further reduction in the marginal LIBOR rates of 0.25% if we maintain a trailing twelve month EBITDA of $100.0 and maintain a fixed charge coverage ratio of 2.0 to 1.0. A commitment fee is payable on any unused portion of the revolving credit facility. The commitment fee varies between 0.250% and 0.375% per annum, based on the fixed charge coverage ratio. The applicable base rate and the effective LIBOR rate were 4.75% and 4.02% as of September 30, 2004.

 

8

 

The revolving credit facility requires us to comply with various affirmative, negative and subjective covenants, the most significant of which are: (i) the maintenance of a borrowing base availability, or, if the required borrowing base availability is not maintained, the maintenance of the fixed charge coverage ratio, (ii) restrictions on additional indebtedness, (iii) restrictions on liens, guarantees and quarterly dividends, and (iv) obtaining the lenders’ consent with respect to certain individual acquisitions. The third amendment to the revolving credit facility allows for an increase in capital expenditures, from $25.0 to $35.0. Additionally, it increased the allowance for restricted payments from $10.0 to $25.0 and for the payment of up to $2.2 of dividends in any fiscal quarter provided that borrowing base availability is greater than $40.0. As long as our availability is $35.0 or greater, we do not have to maintain a minimum fixed charge coverage ratio. Should availability fall below $35.0, we must maintain a fixed charge coverage ratio of 1.0 to 1.0. We were in compliance with all of the covenants as of September 30, 2004.

 

5.     Commitments and Contingencies

 

We are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

6.     Stockholders’ Equity

 

Stock Based Compensation

 

The 2002 Incentive Plan reserves up to 2,015,000 shares of Common Stock for issuance under the Plan. Options granted under the Plan are issued at or above the closing price on the date of the grant. One-third of the options granted under the Plan vest on the first three anniversary dates following the date granted and have a term of five years. Unearned stock grants outstanding at September 30, 2004 and 2003 were 34,000 and zero, respectively.

 

The following is a summary of stock option activity:

 

		Weighted Average Fair Value per Share			Exercise Price per Share							Weighted Average Price per Share				Number of Shares
Balance, December 31, 2003																815,000
Granted to directors		$	3.97		$		10.71	–	$	14.01		$	12.09			107,500
Granted to employees		$	3.78		$	10.71						$	10.71			24,000
Exercised		$	1.27		$	4.75						$	4.75			(17,935	)
Canceled or expired		$	1.27		$	4.75						$	4.75			(17,332	)
Balance, September 30, 2004																911,233
Exercisable as of September 30, 2004												$		6.06		285,806

 

 

9

 

The fair value of these option grants were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Expected dividend yield		0.0	%
Expected stock price volatility		40.0	%
Risk free interest rate		3.0% – 3.9	%
Expected life of options (in years)		4.0

 

We account for our stock option plan under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost for these plans been recognized as a component of compensation expense, consistent with the alternative treatment permitted by current accounting principles (SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”), our net income and net income per share would have decreased as illustrated in the following pro forma table:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income as reported		$	31.8		$	2.8		$	84.0		$	4.9
Deduct:
Total stock-based employee compensation:
Expense determined under fair value based method		(0.1		)	(0.1		)	(0.3		)	(0.1		)
Pro forma net income		$	31.7		$	2.7		$	83.7		$	4.8
Net income per share, Basic:
As reported		$	1.57		$	0.14		$	4.16		$	0.24
Pro forma		$	1.57		$	0.13		$	4.14		$	0.24
Net income per share, Diluted:
As reported		$	1.52		$	0.14		$	4.06		$	0.24
Pro forma		$	1.52		$	0.13		$	4.04		$	0.24

 

7.     Supplemental Cash Flow Information

 

		Nine Months Ended September 30,
		2004			2003
Cash paid for interest		$	5.1		$	4.2
Cash paid (refunded) for income taxes		36.8			(19.4		)

 

10

 

8.     Segment and Related Information

 

The following table shows summarized financial information concerning our reportable segments.

 

		Plates and Shapes			Flat Rolled			Building Products			Corporate And Other			Total
		As of and for the Three Months Ended September 30,
2004:
Net sales		$	166.6		$	201.1		$	49.8		$	(4.9	)	$	412.6
Operating income (loss)		28.7			27.1			1.4			(4.6		)	52.6
Capital expenditures		2.2			0.5			0.5			0.3			3.5
Depreciation and amortization		0.2			0.1			0.1			0.1			0.5
2003:
Net sales		$	91.3		$	112.2		$	46.8		$	(5.2	)	$	245.1
Operating income (loss)		3.2			1.7			5.1			(4.1		)	5.9
Capital expenditures		2.4			1.6			0.6			—			4.6
Depreciation and amortization		0.2			—			—			—			0.2
		As of and for the Nine Months Ended September 30,
2004:
Net sales		$	460.0		$	532.4		$	136.0		$	(13.0	)	$	1,115.4
Operating income (loss)		80.2			64.8			8.7			(12.9		)	140.8
Capital expenditures		7.4			1.4			1.8			3.0			13.6
Depreciation and amortization		0.6			0.2			0.2			0.2			1.2
2003:
Net sales		$	259.2		$	344.2		$	125.7		$	(15.4	)	$	713.7
Operating income (loss)		7.9			5.2			9.9			(10.6		)	12.4
Capital expenditures		5.2			2.2			1.4			—			8.8
Depreciation and amortization		0.2			—			0.1			—			0.3

 

11

 

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See disclosure presented on the inside of the front cover of this report for cautionary information with respect to such forward-looking statements. Readers should refer to “Factors Which May Affect Future Operating Results” included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 for risk factors that may affect future performance.

 

Overview

 

We are a leading provider of value-added processed steel, aluminum and specialty metals, as well as manufactured metal components. Historically, about 85% of our revenues are derived from our metal service center and distribution activities that are segmented into two groups: Flat Rolled, and Plates and Shapes. We purchase metal from primary producers who generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet specifications provided by end-use customers. Our Flat Rolled Group and Plates and Shapes Group customers are in businesses such as the machining, furniture, transportation equipment, power and process equipment, construction/fabrication, consumer durables and electrical equipment industries, and machinery and equipment manufacturers. The remaining portion of our revenue is derived from the Building Products Group, which principally manufactures and distributes aluminum and steel products related to the residential and commercial construction and home improvement industry. Our Building Products Group customers are distributors and contractors engaged in residential and commercial building projects.

 

Critical Accounting Policies

 

We have identified the following critical accounting policies based upon the significance of the policy to and the potential impact of estimates and subjective assessments on our overall financial statement presentation. We have concluded our critical accounting policies are as follows:

 

Accounts Receivable.  We recognize revenue as product is shipped (risk of loss for our products passes at time of shipment), net of provisions for estimated returns. Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of trade accounts and notes receivable. Credit risk associated with cash deposits is low as we have the right of offset with our lenders for the substantial portion of our cash balances. Concentrations of credit risk with respect to trade accounts are within several industries. 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 based upon our expected ability to collect all such accounts. Additionally, we periodically review the credit history of our customers and generally do not require collateral for the extension of credit.

 

Inventories.  Inventories are stated at the lower of cost or market. Our inventories are accounted for using a variety of methods including specific identification, average cost and the first-in first-out, or FIFO, method of accounting. We regularly review inventory on hand and record provisions for obsolete and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for obsolete inventory.

 

12

 

Results of Operations

 

The following unaudited consolidated financial information reflects our historical financial statements.

 

Consolidated Results ¾ Three Months Ended September 30, 2004 Compared to September 30, 2003

 

		2004			%		2003			%
		(In millions, except percentages)
Net sales		$	412.6		100.0	%	$	245.1		100.0	%
Cost of sales		295.1			71.5	%	184.8			75.4	%
Gross profit		117.5			28.5	%	60.3			24.6	%
Operating and delivery		36.6			8.9	%	32.6			13.3	%
Selling, general and administrative		27.8			6.7	%	21.6			8.8	%
Depreciation and amortization		0.5			0.1	%	0.2			0.1	%
Operating income		52.6			12.7	%	5.9			2.4	%
Interest expense		2.1			0.5	%	1.1			0.4	%
Other (income) expense, net		(1.2		)	(0.3	)%	0.1			—
Income before income taxes		$	51.7		12.5	%	$	4.7		1.9	%

 

Net sales.  Net sales increased $167.5 million, or 68.3%, from $245.1 million for the three months ended September 30, 2003 to $412.6 million for the three months ended September 30, 2004. The increase in sales was primarily attributable to a 61.7% increase in average realized prices and a 13.3% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups. Net sales increased for our Building Products Group by $3.0 million.

 

Cost of sales.  Cost of sales increased $110.3 million, or 59.7%, from $184.8 million for the three months ended September 30, 2003, to $295.1 million for the three months ended September 30, 2004. The increase in cost of sales was primarily attributable to a 48.4% increase in the average cost per ton and a 13.3% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups. Cost of sales as a percentage of net sales decreased from 75.4% in 2003 to 71.5% in the same period in 2004. This percentage decrease was due to higher average realized sales prices.

 

Operating and delivery.  Operating and delivery expenses increased $4.0 million, or 12.3%, from $32.6 million for the three months ended September 30, 2003 to $36.6 million for the three months ended September 30, 2004.  This increase is primarily due to the increase in shipments. As a percentage of net sales, operating and delivery expenses decreased from 13.3% for the three months ended September 30, 2003 to 8.9% for the three months ended September 30, 2004. This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Selling, general and administrative.  Selling, general and administrative expenses increased $6.2 million, or 28.7%, from $21.6 million for the three months ended September 30, 2003 to $27.8 million for the three months ended September 30, 2004. This increase was due to higher incentive compensation that resulted from increased sales and gross margins, and $1.9 million of costs associated with management changes and the closing of an administrative office in our Building Products Group. As a percentage of net sales, selling, general and administrative expenses decreased from 8.8% for the three months ended September 30, 2003 to 6.7% for the three months ended September 30, 2004. This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

13

 

Depreciation and amortization.  Depreciation and amortization expense increased $0.3 million, from $0.2 million for the three months ended September 30, 2003 to $0.5 million for the three months ended September 30, 2004, due to capital investment in facilities and equipment made during the past twelve months.

 

Operating income.  Operating income increased $46.7 million, from $5.9 million for the three months ended September 30, 2003 to $52.6 million for the three months ended September 30, 2004.  As a percentage of net sales, operating income increased from 2.4% for the three months ended September 30, 2003 to 12.7% for the three months ended September 30, 2004.  This increase is primarily due to the improved margins and increased shipments in our Flat Rolled and Plates and Shapes Product Groups.

 

Interest expense.  Interest expense increased $1.0 million, or 90.9%, from $1.1 million for the three months ended September 30, 2003 to $2.1 million for the three months ended September 30, 2004, primarily as a result of increased debt incurred to support the increased working capital requirements in 2004.

 

Other (income) expense, net.  Other income for the three months ended September 30, 2004 includes a credit of $1.3 million resulting from a determination that certain accruals recorded by the predecessor company during its Chapter 11 proceedings were no longer deemed necessary.

 

Consolidated Results ¾ Nine Months Ended September 30, 2004 Compared to September 30, 2003

 

		2004			%		2003			%
		(In millions, except percentages)
Net sales		$	1,115.4		100.0	%	$	713.7		100.0	%
Cost of sales		784.7			70.4	%	542.0			75.9	%
Gross profit		330.7			29.6	%	171.7			24.1	%
Operating and delivery		109.7			9.8	%	93.8			13.1	%
Selling, general and administrative		79.0			7.1	%	65.2			9.1	%
Depreciation and amortization		1.2			0.1	%	0.3			—
Operating income		140.8			12.6	%	12.4			1.7	%
Interest expense		5.8			0.5	%	4.4			0.6	%
Other (income) expense, net		(1.6		)	(0.1	)%	(0.2		)	—
Income before income taxes		$	136.6		12.2	%	$	8.2		1.1	%

 

Net sales.  Net sales increased $401.7 million, or 56.3%, from $713.7 million for the nine months ended September 30, 2003 to $1,115.4 million for the nine months ended September 30, 2004.  The increase in sales was primarily attributable to a 35.7% increase in average realized prices and a 22.7% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups.  Net sales increased for our Building Products Group by $10.3 million.

 

Cost of sales.  Cost of sales increased $242.7 million, or 44.8%, from $542.0 million for the nine months ended September 30, 2003, to $784.7 million for the nine months ended September 30, 2004.  The increase in cost of sales was primarily attributable to a 22.8% increase in the average cost per ton and a 22.7% increase in volumes for our Flat Rolled and Plates and Shapes Product Groups.  Cost of sales as a percentage of net sales decreased from 75.9% in 2003 to 70.4% in the same period in 2004.  This percentage decrease was due to higher average realized sales prices.

 

14

 

Operating and delivery.  Operating and delivery expenses increased $15.9 million, or 17.0%, from $93.8 million for the nine months ended September 30, 2003 to $109.7 million for the nine months ended September 30, 2004.  This increase is primarily due to the increase in shipments.  As a percentage of net sales, operating and delivery expenses decreased from 13.1% for the nine months ended September 30, 2003 to 9.8% for the nine months ended September 30, 2004.  This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Selling, general and administrative.  Selling, general and administrative expenses increased $13.8 million, or 21.2%, from $65.2 million for the nine months ended September 30, 2003 to $79.0 million for the nine months ended September 30, 2004.  This increase was principally due to higher incentive compensation resulting from increased sales and gross margins, and $1.9 million of costs associated with management changes and the closing of an administrative office.  As a percentage of net sales, selling, general and administrative expenses decreased from 9.1% for the nine months ended September 30, 2003 to 7.1% for the nine months ended September 30, 2004.  This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Depreciation and amortization.  Depreciation and amortization increased $0.9 million, from $0.3 million for the nine months ended September 30, 2003 to $1.2 million for the nine months ended September 30, 2004, due to capital investment in facilities and equipment made during the prior twelve months.

 

Operating income.  Operating income increased $128.4 million, from $12.4 million for the nine months ended September 30, 2003 to $140.8 million for the nine months ended September 30, 2004.  This increase is due to the improved margins and increased shipments in our Flat Rolled and Plates and Shapes Product Groups.

 

Interest expense.  Interest expense increased $1.4 million, or 31.8% from $4.4 million for the nine months ended September 30, 2003 to $5.8 million for the nine months ended September 30, 2004, primarily as a result of increased debt incurred to support the increased working capital requirements in 2004.

 

Other (income) expense, net.  Other income for the nine months ended September 30, 2004 includes a credit of $1.3 million resulting from a determination that certain accruals recorded by the predecessor company during its Chapter 11 proceedings were no longer deemed necessary.

 

15

 

Segment Results ¾ Three Months Ended September 30, 2004 Compared to September 30, 2003

 

		Net Sales			Operating Costs and Expenses			Operating Income (Loss)			Capital Spending			Tons Shipped (1)
2004:
Plates and Shapes		$	166.6		$	137.9		$	28.7		$	2.2		183
Flat Rolled		201.1			174.0			27.1			0.5			190
Building Products		49.8			48.4			1.4			0.5			—
Corporate and other		(4.9		)	(0.3		)	(4.6		)	0.3			(6	)
Total		$	412.6		$	360.0		$	52.6		$	3.5		367
2003:
Plates and Shapes		$	91.3		$	88.1		$	3.2		$	2.4		174
Flat Rolled		112.2			110.5			1.7			1.6			158
Building Products		46.8			41.7			5.1			0.6			—
Corporate and other		(5.2		)	(1.1		)	(4.1		)	—			(8	)
Total		$	245.1		$	239.2		$	5.9		$	4.6		324

 

(1)  Shipments are expressed in thousands of tons and are not an appropriate measure for the Building Products Group.

 

Plates and Shapes.  Net sales increased $75.3 million, or 82.5%, from $91.3 million for the three months ended September 30, 2003 to $166.6 million for the three months ended September 30, 2004.  This increase is primarily due to a 73.8% increase in the average sales price per ton and a 5.2% increase in shipments for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.  The increase in average realized sales prices was primarily due to the industry-wide raw material cost increases from producing mills and a higher level of demand from the improved U.S. economy.

 

Operating costs and expenses increased $49.8 million, or 56.5%, from $88.1 million for the three months ended September 30, 2003 to $137.9 million for the three months ended September 30, 2004.  This increase was attributable to the higher costs of raw materials and to a lesser extent the increased shipments.  Operating costs and expenses as a percentage of net sales decreased from 96.5% for the three months ended September 30, 2003 to 82.8% for the three months ended September 30, 2004. This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Operating income increased by $25.5 million, from $3.2 million for the three months ended September 30, 2003 to $28.7 million for the three months ended September 30, 2004.  This increase is primarily attributable to increased shipments and improved margins in 2004.  Operating income as a percentage of net sales increased from 3.5% for the three months ended September 30, 2003 to 17.2% for the three months ended September 30, 2004.

 

Flat Rolled.  Net sales increased $88.9 million, or 79.2%, from $112.2 million for the three months ended September 30, 2003 to $201.1 million for the three months ended September 30, 2004.  This increase is primarily due to a 48.9% increase in the average sales price per ton and a 20.3% increase in shipments for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.  The increase in average realized sales prices was primarily due to the industry-wide raw material cost increases

16

 

from producing mills and a higher level of demand from the improved U.S. economy.

 

Operating costs and expenses increased $63.5 million, or 57.5%, from $110.5 million for the three months ended September 30, 2003 to $174.0 million for the three months ended September 30, 2004.  This increase was attributable to the higher cost of raw materials and to a lesser extent from increased shipments.  Operating costs and expenses as a percentage of net sales decreased from 98.5% for the three months ended September 30, 2003 to 86.5% for the three months ended September 30, 2004.  This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Operating income increased by $25.4 million, from $1.7 million for the three months ended September 30, 2003 to $27.1 million for the three months ended September 30, 2004.  This increase is primarily attributable to increased shipments and improved margins in 2004.  Operating income as a percentage of net sales increased from 1.5% for the three months ended September 30, 2003 to 13.5% for the three months ended September 30, 2004.

 

Building Products.  Net sales increased $3.0 million, or 6.4%, from $46.8 million for the three months ended September 30, 2003 to $49.8 million for the three months ended September 30, 2004.  The increase in net sales was principally due to a higher demand for these products.

 

Operating costs and expenses increased $6.7 million, or 16.1%, from $41.7 million for the three months ended September 30, 2003 to $48.4 million for the three months ended September 30, 2004, primarily due to $1.9 million of costs associated with management changes and the closing of an administrative office, higher sales volume, increased cost of raw materials, and product realignment initiatives taken by new division management.  Operating costs and expenses as a percentage of net sales increased from 89.1% for the three months ended September 30, 2003 to 97.2% for the three months ended September 30, 2004.

 

Operating income decreased by $3.7 million, from $5.1 million for the three months ended September 30, 2003 to $1.4 million for the three months ended September 30, 2004.  This decrease is due to $1.9 million of costs associated with management changes and the closing of an administrative office along with increased cost of raw materials and product realignment initiatives taken by new division management.  Operating income as a percentage of net sales decreased from 10.9% for the three months ended September 30, 2003 to 2.8% for the three months ended September 30, 2004.

 

Corporate and other.  This category reflects certain administrative costs and expenses management has not allocated to its industry segments.  These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses.  The negative net sales amount represents the elimination of intercompany sales.  The operating loss increased $0.5 million from $4.1 million for the three months ended September 30, 2003 to $4.6 million for the three months ended September 30, 2004.  This increase is primarily attributable to increased audit fees together with implementation and training costs attributable to our company-wide systems implementation.

 

17

 

Segment Results ¾ Nine Months Ended September 30, 2004 Compared to September 30, 2003

 

		Net Sales				Operating Costs and Expenses			Operating Income (Loss)			Capital Spending			Tons Shipped (1)
2004:
Plates and Shapes		$		460.0		$	379.8		$	80.2		$	7.4		582
Flat Rolled		532.4				467.6			64.8			1.4			602
Building Products		136.0				127.3			8.7			1.8			—
Corporate and other		(13.0			)	(0.1		)	(12.9		)	3.0			(17	)
Total		$		1,115.4		$	974.6		$	140.8		$	13.6		1,167
2003:
Plates and Shapes		$		259.2		$	251.3		$	7.9		$	5.2		492
Flat Rolled		344.2				339.0			5.2			2.2			486
Building Products		125.7				115.8			9.9			1.4			—
Corporate and other		(15.4			)	(4.8		)	(10.6		)	—			(27	)
Total		$	713.7			$	701.3		$	12.4		$	8.8		951

 

(1)  Shipments are expressed in thousands of tons and are not an appropriate measure for the Building Products Group.

 

Plates and Shapes.  Net sales increased $200.8 million, or 77.5%, from $259.2 million for the nine months ended September 30, 2003 to $460.0 million for the nine months ended September 30, 2004.  This increase is primarily due to a 50% increase in the average sales price per ton and an 18.3% increase in shipments for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.  The increase in average realized sales prices was primarily due to the industry-wide raw material cost increases from producing mills and a higher level of demand from the improved U.S. economy.

 

Operating costs and expenses increased $128.5 million, or 51.1%, from $251.3 million for the nine months ended September 30, 2003 to $379.8 million for the nine months ended September 30, 2004.  This increase was attributable to higher cost of raw materials and to a lesser extent the increased shipments.  Operating costs and expenses as a percentage of net sales decreased from 97.0% for the nine months ended September 30, 2003 to 82.6% for the nine months ended September 30, 2004.  This percentage decrease was primarily due to higher average realized sales prices together with fixed costs being spread over a higher volume of net sales.

 

Operating income increased by $72.3 million, from $7.9 million for the nine months ended September 30, 2003 to $80.2 million for the nine months ended September 30, 2004.  This increase is primarily attributable to increased shipments and improved margins in 2004.  Operating income as a percentage of net sales increased from 3.0% for the nine months ended September 30, 2003 to 17.4% for the nine months ended September 30, 2004.

 

Flat Rolled.  Net sales increased $188.2 million, or 54.7%, from $344.2 million for the nine months ended September 30, 2003 to $532.4 million for the nine months ended September 30, 2004.  This increase is primarily due to a 24.9% increase in the average sales price per ton for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, and a 23.9% increase in shipments.  The increase in average realized sales prices was primarily due to the industry-wide raw material cost increases from producing mills and a higher level of demand from the improved U.S. economy.

 

18