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MUSA > SEC Filings for MUSA > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for METALS USA HOLDINGS CORP.


15-Mar-2013

Annual Report


Item 7. 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 page 2 of this report for cautionary information with respect to such forward-looking statements. Readers should refer to Item 1A. "Risk Factors" for risk factors that may affect future performance. The following discussion should be read in conjunction with Item 6. "Selected Financial Data" and Item 8. "Financial Statements and Supplementary Data."

Overview

All references to the "Company" 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 year ended December 31, 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 roofing and aluminum patio 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-use customers. Our Plates and Shapes Group and Flat Rolled and Non-Ferrous Group customers are in the aerospace, automotive industry manufacturing, defense, heavy equipment, marine transportation, commercial construction, office furniture manufacturing, and energy and oilfield services industries. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.

Proposed Acquisition by Reliance

On February 6, 2013, Metals USA Holdings, Reliance and Merger Sub entered into the Merger Agreement, under which Reliance has agreed to acquire Metals USA Holdings. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions therein, Merger Sub will be merged with and into Metals USA Holdings, with Metals USA Holdings surviving as a wholly-owned subsidiary of Reliance. At the effective time of the Merger, each outstanding share of Metals USA Holdings common stock (other than dissenting shares, treasury shares, shares owned by Reliance and its subsidiaries and shares owned by any subsidiary of Metals USA Holdings) will be cancelled and converted into the right to receive $20.65 in cash, without interest. The parties' obligations to complete the Merger are conditioned upon customary closing conditions, including the approval of the Merger and the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Metals USA Holdings common stock. The Merger is not conditioned upon Reliance's receipt of financing. The Merger Agreement contains customary representations, warranties and covenants by each of Reliance and Metals USA Holdings.

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 December 2012 were up 1.8% over the same period of 2011. Inventories at December 31, 2012 increased 2.4% over the December 2011 levels. December MSCI data showed an increase in the months supply on hand to 3.1 as of December 31, 2012 from 2.8 as of December 31, 2011.

Service center companies compete on level and depth of service (value-added processing capabilities, size and shape offerings, speed of delivery, etc.), product offerings, relative cost position within the industry and price. We believe the potential synergies from a larger distribution network further enhance the earnings power of the service center business model.

For the year ended December 31, 2012, our shipping volumes increased approximately 11% compared to the year ended December 31, 2011. We believe that we were able to expand market share and reach in 2012 based on stable operating performance and a strong customer base, with all end markets showing moderate growth with the exception of non-residential construction. At the same time, our cost structure is highly variable, which we believe allows the Company to generate profitability in most economic climates. Our business objective is to build a sustainable competitive advantage that improves competitive strength and long-term market position through creating customer value. We believe our growth in market share in 2012 is evidence of sustainable competitive advantage.

Our view for 2013 assumes gradual cyclical recovery continues and non-residential construction markets follow an historic lagging progression versus residential housing markets, which are showing renewed growth trends. We believe these trends will produce incremental volume for the Company in 2013. We believe that macroeconomic and industry data such as industrial production, durable goods orders, and service center activity points to a relatively stable price environment. Going into 2013, we believe the Company's metal service center business is well positioned to continue to benefit from economic recovery.


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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.

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.

Consolidated Results of Operations

The following financial information reflects our historical financial statements.

                                                              Fiscal Years Ended December 31,
                                          2012            %           2011           %           2010           %
                                                             (in millions, except percentages)
Net sales                               $ 1,983.6        100.0 %    $ 1,885.9       100.0 %    $ 1,292.1       100.0 %
Cost of sales (exclusive of operating
and delivery, and depreciation and
amortization shown below)                 1,530.4         77.2 %      1,445.7        76.7 %        996.7        77.1 %
Operating and delivery                      199.3         10.0 %        175.7         9.3 %        131.9        10.2 %
Selling, general and administrative         113.4          5.7 %        108.1         5.7 %         81.9         6.3 %
Depreciation and amortization                22.7          1.1 %         21.2         1.1 %         17.8         1.4 %
(Gain) loss on sale of property and
equipment                                    (0.2 )        0.0 %           -           -             0.3         0.0 %
Advisory agreement termination charge          -            -              -           -             3.3         0.3 %

Operating income                            118.0          5.9 %        135.2         7.2 %         60.2         4.7 %
Interest expense                             36.3          1.8 %         36.6         1.9 %         38.9         3.0 %
Loss on debt extinguishment                   6.3          0.3 %           -           -             3.5         0.3 %
Other (income) expense, net                  (0.1 )        0.0 %          0.1         0.0 %           -           -

Income before income taxes                   75.5          3.8 %         98.5         5.2 %         17.8         1.4 %
Provision for income taxes                   22.8          1.1 %         33.9         1.8 %          6.3         0.5 %

Net income                              $    52.7          2.7 %    $    64.6         3.4 %    $    11.5         0.9 %

Results of Operations-Year Ended December 31, 2012 Compared to 2011

Net sales. Net sales increased $97.7 million, or 5.2%, from $1,885.9 million for the year ended December 31, 2011 to $1,983.6 million for the year ended December 31, 2012. The increase was primarily attributable to an 11.0% increase in shipments, partially offset by a 4.9% 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 $3.0 million, or 3.5%, for the year ended December 31, 2012 compared to the same period of 2011. Results for the year ended December 31, 2012 include operating results from the Gregor acquisition, which closed on March 12, 2012. In addition, results for the year ended December 31, 2012 include a full year of operating results from the Trident acquisition, which closed on March 11, 2011. Gregor and Trident contributed a combined $47.1 million of incremental sales for the year ended December 31, 2012. Excluding Gregor from our 2012 results and Trident from both 2011 and 2012 results, net sales increased $35.0 million, or 2.1%, for the year ended December 31, 2012 compared to the same period of 2011, which primarily resulted from an 10.8% increase in shipments partially offset by a 6.9% decrease in average realized prices.

Demand for our metal products and processing services grew modestly in 2012 compared to 2011, as we experienced continued improvement in several of the end market segments we serve. Our metal service centers benefitted from steady expansion of manufacturing and industrial production, while there were also indications that the long-depressed non-residential construction segment may be moving toward recovery. We expect these trends to continue in 2013 although there are risks and uncertainties that could affect the performance of the U.S. economy.

Cost of sales. Cost of sales increased $84.7 million, or 5.9%, from $1,445.7 million for the year ended December 31, 2011 to $1,530.4 million for the year ended December 31, 2012. The increase was primarily attributable to an 11.0% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Groups, partially offset by a 4.2% decrease in average cost per ton. Cost of sales for our Building Products Group decreased $3.7 million, or 5.9%. The Gregor and Trident acquisitions added a combined $30.8 million of incremental cost of sales for the year ended December 31, 2012. Excluding Gregor from our 2012 results and Trident from both 2011 and 2012 results, shipments increased 10.8% and average cost per ton decreased 5.7% over 2011. The increase in


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volumes that contributed to higher cost of sales during 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 76.7% for the year ended December 31, 2011 to 77.2% for the year ended December 31, 2012.

Operating and delivery. Operating and delivery expenses increased $23.6 million, or 13.4%, from $175.7 million for the year ended December 31, 2011 to $199.3 million for the year ended December 31, 2012. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $10.9 million and higher freight costs of approximately $3.5 million. The increase in shipments is attributable to growth in general line metal distribution, acquisitions, and value-added metal processing services. Gregor and Trident added a combined $11.7 million of incremental operating and delivery expenses for the year ended December 31, 2012. As a percentage of net sales, operating and delivery expenses increased from 9.3% for the year ended December 31, 2011 to 10.0% for the year ended December 31, 2012.

Selling, general and administrative. Selling, general and administrative expenses increased $5.3 million, or 4.9%, from $108.1 million for the year ended December 31, 2011 to $113.4 million for the year ended December 31, 2012. Higher professional fees contributed approximately $1.2 million to the increase during 2012. We incurred costs of approximately $0.8 million during 2012 in connection with the secondary offering of 4.0 million shares of our common stock by Apollo. We also incurred costs of $0.7 million which were primarily attributable to the Gregor acquisition, which closed in March 2012. The Gregor and Trident acquisitions added a combined $3.7 million of incremental selling, general and administrative expenses for 2012. As a percentage of net sales, selling, general and administrative expenses remained level at 5.7% for the year ended December 31, 2012 as compared to the year ended December 31, 2011.

Depreciation and amortization. Depreciation and amortization expense increased $1.5 million, or 7.1%, from $21.2 million for the year ended December 31, 2011 to $22.7 million for the year ended December 31, 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 December 31, 2012 were $30.1 million compared to $26.6 million as of December 31, 2011. Net property and equipment as of December 31, 2012 was $251.8 million compared to $247.8 million as of December 31, 2011. As a percentage of net sales, depreciation and amortization expense was 1.1% for the years ended December 31, 2012 and 2011.

Operating income. Operating income decreased $17.2 million, or 12.7%, from $135.2 million for the year ended December 31, 2011 to $118.0 million for the year ended December 31, 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 year ended December 31, 2011 to 5.9% for the year ended December 31, 2012.

Interest expense. Interest expense was $36.3 million for the year ended December 31, 2012, an amount that was roughly equivalent to the $36.6 million of interest expense for the year ended December 31, 2011. Although the weighted average outstanding balance on our ABL facility increased from $214.8 million for the year ended December 31, 2011 to $246.8 million for the year ended December 31, 2012, the weighted average facility rate decreased from 2.77% to 2.45% 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 year ended December 31, 2012 was $22.8 million, resulting in an overall effective tax rate of 30.2%, compared to income tax expense of $33.9 million and an overall effective tax rate of 34.4% for the year ended December 31, 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.

Net income.Net income decreased from $64.6 million for the year ended December 31, 2011 to $52.7 million for the year ended December 31, 2012. The decrease was primarily due to the factors that affected the decrease in operating income discussed above. In addition, we incurred approximately $6.3 million of pre-tax expense on debt extinguishment during the fourth quarter of 2012 in connection with the redemption of our 11 1/8% Senior Secured Notes due 2015 (the "Metals USA Notes"). The decrease in net income for 2012 compared to 2011 was partially offset by the impact of lower income tax expense for the year ended December 31, 2012 compared to the same period of 2011.

Results of Operations-Year Ended December 31, 2011 Compared to 2010

Net sales. Net sales increased $593.8 million, or 46.0%, from $1,292.1 million for the year ended December 31, 2010 to $1,885.9 million for the year ended December 31, 2011. The increase was primarily attributable to a 31.8% increase in shipments, in addition to a 12.9% increase in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups. Net sales for our Building Products Group increased $2.8 million, or 3.4%, for the year ended December 31, 2011 compared to the same period of 2010. Results for the year ended December 31, 2011 include operating results from the Trident acquisition, which closed on March 11, 2011, and the ORMS acquisition, which closed on December 31, 2010. In addition, results for the year ended December 31, 2011 include a full twelve months of operating results from the J. Rubin acquisition, which closed on June 28, 2010.


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Trident, ORMS and J. Rubin contributed a combined $194.7 million of incremental sales for the year ended December 31, 2011. Excluding the Trident, ORMS and J. Rubin acquisitions, net sales for our metal service center businesses increased $396.3 million, or 33.3%, for the year ended December 31, 2011 versus the same period of 2010, which primarily resulted from a 16.7% increase in shipments and a 14.2% increase in average realized prices. The increase in prices and volumes is attributable to the cyclical nature of the metal consuming industries supported by our products and services. The economic recovery that continued through 2011 translated into increased metal consumption as industrial production gradually expanded.

According to data from the MSCI, actual shipments for the service center industry for the year ended December 31, 2011 increased 14.2% over the same period of 2010. Inventory levels remained relatively stable throughout 2011. Business conditions were generally favorable for the year ended December 31, 2011 compared to the same period of 2010.

Cost of sales. Cost of sales increased $449.0 million, or 45.0%, from $996.7 million for the year ended December 31, 2010 to $1,445.7 million for the year ended December 31, 2011. The increase was primarily attributable to a 31.8% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, in addition to an 11.8% increase in average cost per ton. Cost of sales for our Building Products Group increased $4.2 million, or 7.2%. The Trident, ORMS and J. Rubin acquisitions added a combined $144.2 million of incremental cost of sales for the year ended December 31, 2011. Excluding the Trident, ORMS and J. Rubin acquisitions, shipments increased 16.7% and average cost per ton increased 13.5% over the same period of 2010. The increase in volumes that contributed to higher cost of sales during 2011 was primarily attributable to the factors that affected the increase in net sales discussed above. Cost of sales as a percentage of net sales decreased from 77.1% for the year ended December 31, 2010 to 76.7% for the same period of 2011.

Operating and delivery. Operating and delivery expenses increased $43.8 million, or 33.2%, from $131.9 million for the year ended December 31, 2010 to $175.7 million for the year ended December 31, 2011. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $5.7 million and higher freight costs of approximately $8.5 million. In addition, Trident, ORMS and J. Rubin added a combined $21.2 million of incremental operating and delivery expenses for the year ended December 31, 2011. As a percentage of net sales, operating and delivery expenses decreased from 10.2% for the year ended December 31, 2010 to 9.3% for the year ended December 31, 2011.

Selling, general and administrative. Selling, general and administrative expenses increased $26.2 million, or 32.0%, from $81.9 million for the year ended December 31, 2010 to $108.1 million for the year ended December 31, 2011. An approximate $7.2 million increase in incentive compensation, which was aligned with the improved performance of our business, contributed to the period-over-period increase. Trident, ORMS and J. Rubin added a combined $12.0 million of incremental selling, general and administrative expenses for the year ended December 31, 2011. We also incurred costs of approximately $1.6 million during 2011 which were primarily attributable to the Trident acquisition, which closed in March 2011. As a percentage of net sales, selling, general and administrative expenses decreased from 6.3% for the year ended December 31, 2010 to 5.7% for the year ended December 31, 2011.

Depreciation and amortization. Depreciation and amortization expense increased $3.4 million, or 19.1%, from $17.8 million for the year ended December 31, 2010 to $21.2 million for the year ended December 31, 2011. The increase was primarily attributable to increases in fixed assets resulting from our growth through acquisitions over the past year and from increased capital spending, as our investments in new equipment grew in line with higher business activity levels. Net property and equipment as of December 31, 2011 was $247.8 million compared to $198.8 million as of December 31, 2010. As a percentage of net sales, depreciation and amortization expenses decreased from 1.4% for the year ended December 31, 2010 to 1.1% for the year ended December 31, 2011.

Operating income. Operating income increased $75.0 million, or 124.6%, from $60.2 million for the year ended December 31, 2010 to $135.2 million for the year ended December 31, 2011. The increase was primarily a result of the increase in net sales discussed above, in addition to the impact associated with the acquisitions of Trident, ORMS and J. Rubin, which contributed a combined $13.1 million of incremental operating income for the year ended December 31, 2011. The increase in operating income during 2011 was also partially attributable to the absence of a $3.3 million charge to operating expense for the termination of our advisory agreement with Apollo in connection with our IPO during the second quarter of 2010. As a percentage of net sales, operating income increased from 4.7% for the year ended December 31, 2010 to 7.2% for the year ended December 31, 2011.

Interest expense. Interest expense decreased $2.3 million, or 5.9%, from $38.9 million for the year ended December 31, 2010 to $36.6 million for the year ended December 31, 2011. The decrease was due to the redemption of Metals USA Holdings' Senior Floating Rate PIK Toggle Notes due 2012 (the "2007 Notes") in May 2010, partially offset by increased interest expense associated with higher borrowings and a higher average facility rate on the ABL facility. The weighted average outstanding balance on our ABL facility increased from $77.6 million for the year ended December 31, 2010 to $214.8 million for the year ended December 31, 2011. Borrowings under the ABL facility were used to fund the Trident and ORMS acquisitions, in addition to higher working capital needs between the two periods.

Income taxes. Income tax expense for the year ended December 31, 2011 was $33.9 million, resulting in an overall effective tax rate of 34.4%, compared to income tax expense of $6.3 million and overall effective tax rate of 35.3% for the year ended December 31, 2010. The decrease in the tax rate in 2011 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 increased from $11.5 million for the year ended December 31, 2010 to $64.6 million for the year ended December 31, 2011. The variance was primarily due to the improved operating performance of our metal service center businesses resulting from increases in end market demand and metal prices, ongoing and permanent cost reductions, and improved returns resulting from aggressive working capital management.

Results of Operations by Segment



                                                                                 Fiscal Years Ended December 31,
                                                                Operating                    Operating
                                       Net                      Costs and                     Income                       Capital        Tons Shipped (1)
                                      Sales           %          Expenses         %           (Loss)            %         Spending        Direct        Toll
2012:
Plates and Shapes                   $   787.1         39.7 %    $    709.6        38.0 %    $      77.5         65.7 %    $    11.1            611         23
Flat Rolled and Non-Ferrous           1,124.7         56.7 %       1,056.8        56.6 %           67.9         57.5 %          7.4            754        176
Building Products                        82.8          4.2 %          81.3         4.4 %            1.5          1.3 %          0.2             -          -
Corporate and other                     (11.0 )       -0.6 %          17.9         1.0 %          (28.9 )      -24.5 %          1.4            (14 )       -

Total                               $ 1,983.6        100.0 %    $  1,865.6       100.0 %    $     118.0        100.0 %    $    20.1          1,351        199


2011:
Plates and Shapes                   $   765.9         40.6 %    $    682.9        39.0 %    $      83.0         61.4 %    $     6.4            567         29
Flat Rolled and Non-Ferrous           1,046.7         55.5 %         968.6        55.3 %           78.1         57.8 %         10.5            685        127
Building Products                        85.8          4.5 %          86.5         4.9 %           (0.7 )       -0.5 %          4.6             -          -
Corporate and other                     (12.5 )       -0.7 %          12.7         0.7 %          (25.2 )      -18.6 %          0.3            (12 )       -

Total                               $ 1,885.9        100.0 %    $  1,750.7       100.0 %    $     135.2        100.0 %    $    21.8          1,240        156


2010:
Plates and Shapes                   $   538.0         41.6 %    $    499.6        40.6 %    $      38.4         63.8 %    $     2.3            488         21
Flat Rolled and Non-Ferrous             680.5         52.7 %         635.2        51.6 %           45.3         75.2 %          0.7            528         30
Building Products                        83.0          6.4 %          83.6         6.8 %           (0.6 )       -1.0 %           -              -          -
Corporate and other                      (9.4 )       -0.7 %          13.5         1.1 %          (22.9 )      -38.0 %          1.0             (8 )       -

Total                               $ 1,292.1        100.0 %    $  1,231.9       100.0 %    $      60.2        100.0 %    $     4.0          1,008         51

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

Segment Results-Year Ended December 31, 2012 Compared to 2011

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