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MUSA > SEC Filings for MUSA > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for METALS USA HOLDINGS CORP.

Form 10-Q for METALS USA HOLDINGS CORP.


8-Nov-2012

Quarterly Report


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 "Forward-Looking Statements" for cautionary information with respect to such forward-looking statements. Readers should refer to "Risk Factors" included in our Annual Report on Form 10-K for risk factors that may affect future performance.

Overview

All references to the "Company," "we" or "our" include Metals USA Holdings, Flag Intermediate, its wholly-owned subsidiary Metals USA, and the wholly-owned subsidiaries of Metals USA.

We believe that we are a leading provider of value-added processed carbon steel, stainless steel, aluminum and specialty metals, as well as manufactured metal components. For the nine months ended September 30, 2012, approximately 96% of our revenue was derived from our metals service center and processing activities, which are segmented into two groups: Flat Rolled and Non-Ferrous Group and Plates and Shapes Group. The remaining portion of our revenue was derived from our Building Products Group, which principally manufactures and sells aluminum products related to the residential remodeling industry. We purchase metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet the specifications provided by end-users. Our Plates and Shapes Group and Flat Rolled and Non-Ferrous Group customers are in multiple industries, including aerospace, automotive, defense, heavy equipment, marine transportation, commercial construction, office furniture manufacturing, and energy and oilfield services. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.

Industry Trends

Metals Service Centers

According to data from the Metals Service Center Institute ("MSCI"), year-to-date actual shipments for the U.S. service center industry through September 2012 were up 3.3% over the same period of 2011. Inventories at September 30, 2012 increased 3.1% over the September 2011 levels. September MSCI data showed an increase in the months supply on hand to 2.8 as of September 30, 2012 from 2.5 as of September 30, 2011.

Steel prices are generally sensitive to changes in global and local demand, which are in turn governed by worldwide and country-specific economic conditions and available production capacity. Changes in raw material prices, namely iron ore and metallurgical coal, also influence steel selling prices. For metal service centers, margins are affected by the extent to which changes in raw material prices are passed through to selling prices, as well as the time lag between raw material price changes and steel selling price changes.

Global steel demand continues to improve gradually in line with the recovery of end user industries. As of October 2012, the World Steel Association forecasted global apparent steel use to increase by 2.1% in 2012. We believe that in the absence of any unanticipated macroeconomic disruptions, no near term catalyst that would materially alter current price and demand trends is visible on the immediate horizon.

Building Products

The downturn in the housing and mortgage markets has caused significant contraction in the home improvement remodeling industry. While the pace of the decline in homeowner remodeling projects appears to be moderating, increased remodeling activity does not seem likely to materialize until further signs of recovery emerge in the broader housing market. Although lower financing costs are reducing the cost of financing home improvement projects, weak home prices and decreased cost recovery for many types of remodeling projects continue to discourage upper-end remodeling improvements.


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Product demand for the Company's Building Products Group may be influenced by numerous factors such as general economic conditions, consumer confidence, housing prices, existing home sales, interest rates and homeowner lending. The absence of a sustained recovery in any of these factors could continue to limit growth for our Building Products segment.

Results of Operations

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

     Consolidated Results-Three Months Ended September 30, 2012 Compared to
                               September 30, 2011



                                                     2012            %           2011            %
                                                            (In millions, except percentages)
Net sales                                           $ 483.7         100.0 %     $ 492.3         100.0 %
Cost of sales (exclusive of operating and
delivery, and depreciation and amortization
shown below)                                          372.8          77.1 %       379.8          77.1 %
Operating and delivery                                 49.4          10.2 %        44.0           8.9 %
Selling, general and administrative                    28.4           5.9 %        28.3           5.7 %
Depreciation and amortization                           5.8           1.2 %         5.0           1.0 %
Gain on sale of property and equipment                 (0.1 )         0.0 %        (0.1 )         0.0 %

Operating income                                       27.4           5.7 %        35.3           7.2 %
Interest expense                                        9.0           1.9 %         9.3           1.9 %
Other (income) expense, net                            (0.2 )         0.0 %         0.1           0.0 %

Income before income taxes                             18.6           3.8 %        25.9           5.3 %
Provision for income taxes                              4.9           1.0 %         9.2           1.9 %

Net income                                          $  13.7           2.8 %     $  16.7           3.4 %

Net sales. Net sales decreased $8.6 million, or 1.7%, from $492.3 million for the three months ended September 30, 2011 to $483.7 million for the three months ended September 30, 2012. The decrease was primarily attributable to an 11.9% decrease in average realized prices, partially offset by an 11.7% increase in shipped tonnage for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups. Net sales for our Building Products Group decreased $1.2 million for the third quarter of 2012 compared to the third quarter of 2011. Results for the quarter ended September 30, 2012 include a full three months of results of operations from the Gregor acquisition, which closed on March 12, 2012. Gregor contributed $2.8 million of incremental sales for the three months ended September 30, 2012.

Carbon steel pricing declined during the third quarter of 2012 compared to the second quarter of 2012 due to an oversupply in the market caused by steel mill utilization rates that were high relative to apparent demand. Reduced stock levels throughout the supply chain resulted in lower mill orders and shorter mill lead times. The decline in pricing also reflects an easing of raw material input costs for mills.

We do not expect any significant increases in steel prices during the remainder of 2012, as the fourth quarter is typically seasonally weaker in terms of demand due to fewer shipping days. We expect demand trends to remain stable, adjusted downward for normal seasonality, based on current end market demand and macroeconomic conditions.

Cost of sales. Cost of sales decreased $7.0 million, or 1.8%, from $379.8 million for the three months ended September 30, 2011 to $372.8 million for the three months ended September 30, 2012. The decrease was primarily attributable to an 11.9% decrease in average cost per ton, partially offset by an 11.7% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups. Cost of sales for our Building


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Products Group decreased $1.2 million, or 6.9%, for the third quarter of 2012 compared to the third quarter of 2011. The Gregor acquisition added $0.9 million of incremental cost of sales for the quarter ended September 30, 2012. Cost of sales as a percentage of net sales remained unchanged at 77.1% for the three months ended September 30, 2012 compared to the same period of 2011.

Operating and delivery. Operating and delivery expenses increased $5.4 million, or 12.3%, from $44.0 million for the three months ended September 30, 2011 to $49.4 million for the three months ended September 30, 2012. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $2.7 million and higher freight costs of approximately $0.6 million. Gregor added $0.7 million of incremental operating and delivery expenses for the third quarter of 2012. As a percentage of net sales, operating and delivery expenses increased from 8.9% for the three months ended September 30, 2011 to 10.2% for the three months ended September 30, 2012.

Selling, general and administrative. Selling, general and administrative expenses increased $0.1 million from $28.3 million for three months ended September 30, 2011 to $28.4 million for the three months ended September 30, 2012. We incurred costs of approximately $0.6 million during the third quarter of 2012 in connection with the secondary offering of 4.0 million shares of our common stock by Apollo. Gregor added $0.5 million of incremental selling, general and administrative expenses for the third quarter of 2012. The increase was partially offset by lower incentive compensation expense and lower employee benefit expense. As a percentage of net sales, selling, general and administrative expenses increased from 5.7% for the three months ended September 30, 2011 to 5.9% for the three months ended September 30, 2012.

Depreciation and amortization. Depreciation and amortization expense increased $0.8 million, or 16.0%, from $5.0 million for the three months ended September 30, 2011 to $5.8 million for the three months ended September 30, 2012. The increase was primarily due to higher amortization of acquired intangible assets associated with our recent acquisitions, and to a lesser extent to the increase in our fixed asset base from our growth through acquisitions and from increased capital spending, partially offset by the aging of existing equipment and lower depreciation associated with the in-place fixed asset base. Net intangible assets as of September 30, 2012 were $31.2 million compared to $27.2 million as of September 30, 2011. Net property and equipment as of September 30, 2012 was $250.0 million compared to $241.4 million as of September 30, 2011. As a percentage of net sales, depreciation and amortization expense increased from 1.0% for the three months ended September 30, 2011 to 1.2% for the three months ended September 30, 2012.

Operating income. Operating income decreased $7.9 million, or 22.4%, from $35.3 million for the three months ended September 30, 2011 to $27.4 million for the three months ended September 30, 2012. The decrease was primarily a result of the increase in variable operating costs that have accompanied stronger sales volumes, in addition to lower average selling prices. As a percentage of net sales, operating income decreased from 7.2% for the three months ended September 30, 2011 to 5.7% for the three months ended September 30, 2012.

Interest expense. Interest expense was $9.0 million for the three months ended September 30, 2012 compared to $9.3 million for the three months ended September 30, 2011. The weighted average outstanding balance on our ABL facility for the third quarter of 2012 was $241.6 million compared to $242.1 million for the third quarter of 2011. The weighted average facility rate decreased from 2.62% to 2.41% between the two periods.

Income taxes. Income tax expense for the three months ended September 30, 2012 was $4.9 million, resulting in an overall effective tax rate of 26.3%, compared to income tax expense of $9.2 million and an overall effective tax rate of 35.5% for the three months ended September 30, 2011. The decrease in the tax rate in 2012 is primarily due to the impact of state taxes, permanent items, and the resolution of uncertain tax positions, including those resolved due to the lapsing of statutes of limitation, on the respective levels of pre-tax book income.


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Net income. Net income decreased $3.0 million, or 18.0%, from $16.7 million for the three months ended September 30, 2011 to $13.7 million for the three months ended September 30, 2012. The variance was primarily due to lower average realized selling prices, which impacted margins, along with higher variable operating costs associated with increased volumes, partially offset by the impact of lower income tax expense. We continue to work to improve the performance of the business through compressing our controllable cost base and improving returns through aggressive working capital management.

     Consolidated Results-Nine Months Ended September 30, 2012 Compared to
                               September 30, 2011



                                                   2012             %            2011            %
                                                          (In millions, except percentages)
Net sales                                        $ 1,546.1         100.0 %     $ 1,430.2        100.0 %
Cost of sales (exclusive of operating and
delivery, and depreciation and amortization
shown below)                                       1,194.3          77.2 %       1,092.4         76.4 %
Operating and delivery                               151.4           9.8 %         131.0          9.2 %
Selling, general and administrative                   84.0           5.4 %          83.0          5.8 %
Depreciation and amortization                         16.7           1.1 %          15.4          1.1 %
Gain on sale of property and equipment                (0.2 )         0.0 %            -            -

Operating income                                      99.9           6.5 %         108.4          7.6 %
Interest expense                                      27.4           1.8 %          27.6          1.9 %
Other (income) expense, net                           (0.2 )         0.0 %           0.1          0.0 %

Income before income taxes                            72.7           4.7 %          80.7          5.6 %
Provision for income taxes                            23.7           1.5 %          30.1          2.1 %

Net income                                       $    49.0           3.2 %     $    50.6          3.5 %

Net sales. Net sales increased $115.9 million, or 8.1%, from $1,430.2 million for the nine months ended September 30, 2011 to $1,546.1 million for the nine months ended September 30, 2012. The increase was primarily attributable to a 12.0% increase in shipments, partially offset by a 3.0% decrease in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups. Net sales for our Building Products Group decreased $2.3 million, or 3.5% for the nine months ended September 30, 2012 compared to the same period of 2011. Results for the nine months ended September 30, 2012 include operating results from the Gregor acquisition, which closed on March 12, 2012. In addition, results for the nine months ended September 30, 2012 include a full nine months of operating results from the Trident acquisition, which closed on March 11, 2011. Gregor and Trident contributed a combined $47.8 million of incremental sales for the nine months ended September 30, 2012. Excluding the Gregor and Trident acquisitions, net sales increased $68.1 million, or 5.1%, for the nine months ended September 30, 2012 compared to the same period of 2011, which primarily resulted from an 11.6% increase in shipments partially offset by a 5.4% decrease in average realized prices.

The increase in volumes is attributable to the cyclical nature of the metal consuming industries supported by our products and services. The economic recovery that has continued through the first nine months of 2012 has translated into increased metal consumption as industrial production continues to gradually expand. We expect sequential quarter demand trends to remain stable, adjusted downward for normal seasonality, based on current end market demand and macroeconomic conditions.

Cost of sales. Cost of sales increased $101.9 million, or 9.3%, from $1,092.4 million for the nine months ended September 30, 2011 to $1,194.3 million for the nine months ended September 30, 2012. The increase was primarily attributable to a 12.0% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups, partially offset by a 1.8% decrease in average cost per ton. Cost of sales for our Building Products Group decreased $1.6 million, or 3.4%. The Gregor and Trident acquisitions added a combined $32.9 million of incremental cost of sales for the nine months ended September 30, 2012. Excluding the Gregor and Trident acquisitions, shipments increased 11.6% and average cost per ton decreased 3.9% over the same


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period of 2011. The increase in volumes that contributed to higher cost of sales during the first nine months of 2012 was primarily attributable to the factors that affected the increase in net sales discussed above. Cost of sales as a percentage of net sales increased from 76.4% for the nine months ended September 30, 2011 to 77.2% for the same period of 2012.

Operating and delivery. Operating and delivery expenses increased $20.4 million, or 15.6%, from $131.0 million for the nine months ended September 30, 2011 to $151.4 million for the nine months ended September 30, 2012. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $8.9 million and higher freight costs of approximately $3.2 million. Gregor and Trident added a combined $11.0 million of incremental operating and delivery expenses for the first nine months of 2012. As a percentage of net sales, operating and delivery expenses increased from 9.2% for the nine months ended September 30, 2011 to 9.8% for the nine months ended September 30, 2012.

Selling, general and administrative. Selling, general and administrative expenses increased $1.0 million, or 1.2%, from $83.0 million for the nine months ended September 30, 2011 to $84.0 million for the nine months ended September 30, 2012. We incurred costs of approximately $0.6 million during the third quarter of 2012 in connection with the secondary offering of 4.0 million shares of our common stock by Apollo. We also incurred costs of $0.6 million which were primarily attributable to the Gregor acquisition, which closed in March 2012. The Gregor and Trident acquisitions added a combined $2.1 million of incremental selling, general and administrative expenses for the first nine months of 2012. As a percentage of net sales, selling, general and administrative expenses decreased from 5.8% for the nine months ended September 30, 2011 to 5.4% for the nine months ended September 30, 2012.

Depreciation and amortization. Depreciation and amortization expense increased $1.3 million, or 8.4%, from $15.4 million for the nine months ended September 30, 2011 to $16.7 million for the nine months ended September 30, 2012. The increase was primarily due to higher amortization of acquired intangible assets associated with our recent acquisitions, and to a lesser extent to the increase in our fixed asset base from our growth through acquisitions and from increased capital spending, partially offset by the aging of existing equipment and lower depreciation associated with the in-place fixed asset base. Net intangible assets as of September 30, 2012 were $31.2 million compared to $27.2 million as of September 30, 2011. Net property and equipment as of September 30, 2012 was $250.0 million compared to $241.4 million as of September 30, 2011. As a percentage of net sales, depreciation and amortization expense was 1.1% for the nine months ended September 30, 2012 and 2011.

Operating income. Operating income decreased $8.5 million, or 7.8%, from $108.4 million for the nine months ended September 30, 2011 to $99.9 million for the nine months ended September 30, 2012. The decrease was primarily a result of the increase in variable operating costs that have accompanied stronger sales volumes, in addition to lower average selling prices. As a percentage of net sales, operating income decreased from 7.6% for the nine months ended September 30, 2011 to 6.5% for the nine months ended September 30, 2012.

Interest expense. Interest expense was $27.4 million for the nine months ended September 30, 2012, an amount that was roughly equivalent to the $27.6 million of interest expense for the nine months ended September 30, 2011. Although the weighted average outstanding balance on our ABL facility increased from $207.1 million for the nine months ended September 30, 2011 to $254.8 million for the nine months ended September 30, 2012, the weighted average facility rate decreased from 2.93% to 2.48% between the two periods. Borrowings under the ABL facility were used to fund the Gregor acquisition, in addition to higher working capital needs between the two periods.

Income taxes. Income tax expense for the nine months ended September 30, 2012 was $23.7 million, resulting in an overall effective tax rate of 32.6%, compared to income tax expense of $30.1 million and an overall effective tax rate of 37.3% for the nine months ended September 30, 2011. The decrease in the tax rate in 2012 is primarily due to the impact of state taxes, permanent items, and the resolution of uncertain tax positions, including those resolved due to the lapsing of statutes of limitation, on the respective levels of pre-tax book income.


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Net income. Net income decreased from $50.6 million for the nine months ended September 30, 2011 to $49.0 million for the nine months ended September 30, 2012. The decrease was primarily due to the factors that affected the decrease in operating income discussed above, partially offset by the impact of lower income tax expense.

Segment Results-Three Months Ended September 30, 2012 Compared to September 30, 2011

                                                Operating       Operating                         Tons  Shipped(1)
                                    Net         Costs and        Income          Capital
                                   Sales        Expenses         (Loss)         Spending       Direct            Toll
                                                               (in millions, except tons)
2012:
Plates and Shapes                 $ 195.6      $     177.5     $      18.1      $     2.8           152               7
Flat Rolled and Non-Ferrous         266.7            251.2            15.5            1.8           174              51
Building Products                    23.5             22.1             1.4             -             -               -
Corporate and other                  (2.1 )            5.5            (7.6 )          0.2            (3 )            -

Total                             $ 483.7      $     456.3     $      27.4      $     4.8           323              58

2011:
Plates and Shapes                 $ 191.3      $     171.3     $      20.0      $     1.9           139               7
Flat Rolled and Non-Ferrous         279.7            259.1            20.6            4.5           168              30
Building Products                    24.7             23.8             0.9             -             -               -
Corporate and other                  (3.4 )            2.8            (6.2 )           -             (3 )            -

Total                             $ 492.3      $     457.0     $      35.3      $     6.4           304              37

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

Plates and Shapes. Net sales increased $4.3 million, or 2.2%, from $191.3 million for the three months ended September 30, 2011 to $195.6 million for the three months ended September 30, 2012. The increase was primarily attributable to an 8.9% increase in shipped tonnage, partially offset by a 6.1% decrease in average realized prices for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Selling prices for our Plates and Shapes Group are more transactional in nature and are therefore affected to a greater extent by short term changes in mill pricing, as opposed to our Flat Rolled and Non-Ferrous Group, which conducts a larger percentage of its business on a contractual basis, allowing for a longer time lag between mill price changes and their effect on selling prices. Although we experienced downward price momentum during the third quarter of 2012, end-user demand improved compared to the third quarter of 2011 as evidenced by stronger shipping volumes. Specific sectors that continue to show strong demand are energy and oilfield services, construction heavy equipment, defense, and marine cargo transport vessels.

Operating costs and expenses increased $6.2 million, or 3.6%, from $171.3 million for the three months ended September 30, 2011 to $177.5 million for the three months ended September 30, 2012. The increase was primarily attributable to an 8.9% increase in shipped tonnage, partially offset by a 5.2% decrease in average cost per ton for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Operating costs and expenses as a percentage of net sales increased from 89.5% for the three months ended September 30, 2011 to 90.7% for the three months ended September 30, 2012.

Operating income decreased $1.9 million, or 9.5%, from $20.0 million for the three months ended September 30, 2011 to $18.1 million for the three months ended September 30, 2012. The decrease primarily resulted from a decrease in margins attributable to lower mill prices, in addition to higher variable operating costs associated with increased shipments. Operating income as a percentage of net sales decreased from 10.5% for the three months ended September 30, 2011 to 9.3% for the three months ended September 30, 2012.


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Flat Rolled and Non-Ferrous. Net sales decreased $13.0 million, or 4.6%, from $279.7 million for the three months ended September 30, 2011 to $266.7 million for the three months ended September 30, 2012. The decrease was primarily attributable to a 16.1% decrease in average realized prices, partially offset by a 13.6% increase in shipments for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Results for the quarter ended September 30, 2012 include $2.8 million of incremental sales from the Gregor acquisition. Toll processed tonnage increased from 30,000 tons during the third quarter of 2011 to 51,000 tons during the third quarter of 2012. Sales of non-ferrous metals accounted for approximately 41% of the segment's sales product mix for the third quarter of 2012, an amount that was equivalent to the sales of non-ferrous metals for the third quarter of 2011. Our Flat Rolled and Non-Ferrous segment experienced strong demand in the residential and commercial . . .

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