FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 0-22462 Gibraltar Steel Corporation (Exact name of Registrant as specified in its charter) Delaware 16-1445150 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3556 Lake Shore Road, P.O. Box 2028, Buffalo, New York 14219-0228 (Address of principal executive offices) (716) 826-6500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of September 30, 1998, the number of common shares outstanding was: 12,481,293. 1 of 13
GIBRALTAR STEEL CORPORATION INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1998 (unaudited) and December 31, 1997 (audited) 3 Condensed Consolidated Statements of Income Three and nine months ended September 30, 1998 and 1997 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1998 and 1997 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 11 PART II. OTHER INFORMATION 12 2 of 13
PART I. FINANCIAL INFORMATION Item 1. Financial Statements GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) September 30, December 31, 1998 1997 (unaudited) (audited) <TABLE> <S> <S><S> <C> <C> Assets Current assets: Cash and cash equivalents $ 2,314 $ 2,437 Accounts receivable 82,149 49,151 Inventories 112,000 76,701 Other current assets 4,390 2,457 Total current assets 200,853 130,746 Property, plant and equipment, net 157,033 115,402 Other assets 83,839 35,188 $ 441,725 $ 281,336 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 59,040 $ 38,233 Accrued expenses 14,904 3,644 Current maturities of long-term debt 1,292 1,224 Total current liabilities 75,236 43,101 Long-term debt 188,713 81,800 Deferred income taxes 20,635 15,094 Other non-current liabilities 1,738 1,297 Shareholders' equity Preferred shares - - Common shares 125 124 Additional paid-in capital 66,530 66,190 Retained earnings 88,748 73,730 Total shareholders' equity 155,403 140,044 $ 441,725 $ 281,336 ======== ======== </TABLE> See accompanying notes to financial statements 3 of 13
GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (unaudited) (unaudited) <TABLE> <S><S><S> <C> <C> <C> <C> Net sales $ 152,628 $ 114,249 $ 413,893 $ 341,739 Cost of sales 124,937 96,102 339,149 284,977 Gross profit 27,691 18,147 74,744 56,762 Selling, general and administrative expense 15,777 10,525 42,026 31,177 Income from operations 11,914 7,622 32,718 25,585 Interest expense 3,337 1,310 7,688 3,907 Income before taxes 8,577 6,312 25,030 21,678 Provision for income taxes 3,431 2,525 10,012 8,748 Net income $ 5,146 $ 3,787 $ 15,018 $ 12,930 ========= ========= ========= ========= Net income per share-Basic $ .41 $ .31 $ 1.21 $ 1.05 ========= ========= ========= ========= Weighted average number of shares outstanding-Basic 12,477 12,372 12,446 12,341 ========= ========= ========= ========= Net income per share-Diluted $ .41 $ .30 $ 1.19 $ 1.03 ========= ========= ========= ========= Weighted average number of shares outstanding-Diluted 12,612 12,637 12,640 12,584 ========= ========= ========= ========= </TABLE> See accompanying notes to financial statements 4 of 13
GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Nine Months Ended September 30, 1998 1997 (unaudited) <TABLE> <S><S><S> <C> <C> Cash flows from operating activities Net income $ 15,018 $ 12,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,368 6,216 Provision for deferred income taxes 1,329 1,230 Undistributed equity investment income (259) (383) Other noncash adjustments 275 239 Increase (decrease) in cash resulting from changes in (net of acquisitions): Accounts receivable (18,238) (8,849) Inventories (18,958) 5,610 Other current assets (1,356) (1,099) Accounts payable and accrued expenses 16,111 (2,160) Other assets (757) (390) Net cash provided by operating activities 2,533 13,344 Cash flows from investing activities Acquisitions, net of cash acquired (86,799) (26,475) Purchases of property, plant and equipment (16,807) (17,677) Net proceeds from sale of property and equipment 108 87 Net cash used in investing activities (103,498) (44,065) Cash flows from financing activities Long-term debt reduction (28,002) (62,059) Proceeds from long-term debt 128,778 89,365 Net proceeds from issuance of common stock 66 792 Net cash provided by financing activities 100,842 28,098 Net decrease in cash and cash equivalents (123) (2,623) Cash and cash equivalents at beginning of year 2,437 5,545 Cash and cash equivalents at end of period $ 2,314 $ 2,922 ======= ======= </TABLE> See accompanying notes to financial statements 5 of 13
GIBRALTAR STEEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements as of September 30, 1998 and 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at September 30, 1998 and 1997 have been included. Certain information and footnote disclosures including significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements included in the Company's Annual Report to Shareholders for the year ended December 31, 1997. The results of operations for the nine month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Inventories consist of the following: (in thousands) September 30, December 31, 1998 1997 (unaudited) (audited) Raw material $ 75,014 $ 51,804 Finished goods and work-in-process 36,986 24,897 Total inventories $112,000 $ 76,701 ======= ======= 6 of 13
3. STOCKHOLDERS' EQUITY The changes in stockholders' equity consist of: (in thousands) Additional Common Shares Paid-in Retained Shares Amount Capital Earnings December 31, 1997 12,410 $ 124 $ 66,190 $ 73,730 Net Income - - - 15,018 Stock options exercised 5 - 65 - Restricted stock granted 55 1 - - Earned portion of restricted stock - - 58 - Profit sharing plan contribution 11 - 217 - September 30, 1998 12,481 $ 125 $ 66,530 $ 88,748 ==================================== 4. EARNINGS PER SHARE Basic net income per share equals net income divided by the weighted average shares outstanding for the nine months ended September 30, 1998 and 1997. The computation of diluted net income per share includes all dilutive common stock equivalents in the weighted average shares outstanding. The reconciliation between basic and diluted earnings per share is as follows: Basic Basic Diluted Diluted Income Shares EPS Shares EPS 1998 $15,018,000 12,446,209 $1.21 12,639,655 $1.19 1997 $12,930,000 12,340,900 $1.05 12,584,083 $1.03 Included in diluted shares are common stock equivalents relating to options of 193,446 and 243,183 for 1998 and 1997, respectively. 5. ACQUISITIONS On June 1, 1998, the Company purchased all the outstanding common stock of United Steel Products Company (USP) for approximately $24 million in cash. USP designs and manufacturers lumber connector products for the wholesale market and plastic molded products for component manufacturers. On April 1, 1998, the Company purchased the assets and business of Appleton Supply Co., Inc. (Appleton) for approximately $28 million in cash. Appleton manufactures louvers, roof edging, soffitts and other metal building products for wholesale distribution. 7 of 13
On March 1, 1998, the Company purchased the assets and business of The Solar Group (Solar) for approximately $35 million in cash. Solar manufactures a line of construction products as well as a complete line of mailboxes, primarily manufactured with galvanized steel. On January 31, 1997, the Company purchased all of the outstanding capital stock of Southeastern Metals Manufacturing Company, Inc. (SEMCO) for approximately $25 million in cash. SEMCO manufactures a wide array of metal products for the residential and commercial construction markets. These acquisitions have been accounted for under the purchase method. Results of operations of USP, Appleton, Solar and SEMCO have been consolidated with the Company's results of operations from the respective acquisition dates. The aggregate excess of the purchase prices of these acquisitions over the fair market values of the net assets of the acquired companies is approximately $58 million and is being amortized over 35 years from the acquisition dates using the straight-line method. The following information presents the pro forma consolidated condensed results of operations as if the acquisitions had occurred on January 1, 1997. The pro forma amounts may not be indicative of the results that actually would have been achieved had the acquisitions occurred as of January 1, 1997 and are not necessarily indicative of future results of the combined companies. (in thousands, except per share data) Nine Months Ended September 30, 1998 1997 (unaudited) Net sales $ 442,425 $ 437,477 ======== ======== Income before taxes $ 25,486 $ 23,968 ======== ======== Net income $ 15,225 $ 14,165 ======== ======== Net income per share-Basic $ 1.22 $ 1.15 ======== ======== 6. SUBSEQUENT EVENT On October 1, 1998, the Company purchased all the outstanding capital stock of Harbor Metal Treating Co. and its affiliates (collectively, Harbor Metal) for $13.5 million in cash. The results of operations of Harbor Metal will be consolidated with the Company's results of operations from the acquisition date for the quarter ending December 31, 1998. 8 of 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales of $152.6 million for the third quarter ended September 30, 1998 increased 33.6% from sales of $114.2 million for the prior year's third quarter. Net sales of $413.9 million for the nine months ended September 30, 1998 increased 21.1% from net sales of $341.7 million for the same period of 1997. These increases resulted from including net sales of Solar (acquired March 1, 1998), Appleton (acquired April 1, 1998) and USP (acquired June 1, 1998) and sales growth at existing operations despite the impact of decreased sales due to a 54 day strike at General Motors, which was settled in late July 1998. Cost of sales as a percentage of net sales decreased to 81.9% for both the third quarter and the first nine months of 1998. Gross profit increased to 18.1% for both periods in 1998 from 15.9% and 16.6% for the comparable periods in 1997. This increase is primarily due to higher margins at SEMCO, Solar, Appleton and USP, which have historically generated higher margins than the Company's other products and services, and due to lower raw material costs at existing operations. Selling, general and administrative expenses as a percentage of net sales increased to 10.3% and 10.2% for the third quarter and nine months ended September 30, 1998, respectively, from 9.2% and 9.1% for the same periods of 1997. These increases were primarily due to higher costs as a percentage of sales attributable to Solar, Appleton and USP and performance based compensation linked to the Company's sales and profitability. Interest expense for the third quarter and nine months ended September 30, 1998 increased by $2.0 million and $3.8 million, respectively, from the same periods in 1997 primarily due to higher borrowings to finance the Solar, Appleton and USP acquisitions and capital expenditures. As a result of the above, income before taxes increased by $2.3 million and $3.4 million for the third quarter and nine months ended September 30, 1998 from the same periods of 1997. Income taxes for the third quarter and nine months ended September 30, 1998 approximated $3.4 million and $10.0 million, respectively, and were based on a 40.0% effective tax rate for both periods compared to an effective tax rate of 40.0% and 40.4%, respectively, for the same periods in 1997. Liquidity and Capital Resources During the first nine months of 1998, the Company increased its working capital to $125.6 million. Additionally, shareholders' equity increased to $155.4 million at September 30, 1998. The Company's principal capital requirements are to fund its operations, including working capital, the purchase and funding of improvements to its facilities, machinery and equipment and to fund acquisitions. 9 of 13
Net income of $15.0 million and depreciation and amortization of $9.4 million combined with an increase in accounts payable and accrued expenses (net of acquisition) of $16.1 million to provide cash of $40.5 million. Increases in inventory and accounts receivable of approximately $37.2 million in aggregate, necessary to service increased sales levels, primarily resulted in net cash provided by operations of approximately $2.5 million. Capital expenditures of $16.8 million and the acquisition of Solar, Appleton and USP for cash totalling approximately $86.8 million were primarily funded by net borrowings of $100.8 million under the Company's credit facility and cash provided by operations. At September 30, 1998 the Company's aggregate credit facilities available approximated $239 million with borrowings of approximately $189 million with an additional availability of approximately $50 million. The Company used approximately $13.5 million of the facility on October 1, 1998 for the acquisition of Harbor Metal. The Company believes that availability of funds under its credit facilities together with cash generated from operations will be sufficient to provide the Company with the liquidity and capital resources necessary to support its existing operations. The Company also believes it has the financial capability to increase its long- term borrowing capacity due to changes in capital requirements. Impact of Year 2000 The Year 2000 issue concerns the inability of some computer hardware and software to distinguish between the year 1900 and the year 2000. If not corrected, computer applications could fail or create erroneous results. The Company is conducting a detailed assessment of all of its information technology and non-information technology hardware and software with regard to Year 2000 issues. The Company's plan to ensure that its systems are Year 2000 ready is comprised of: cataloging all processes and systems which may have a date-related component and identifying those which are not Year 2000 ready; correcting or replacing those systems which are not Year 2000 ready; and testing the corrected or replaced processes and systems to insure that they will, in fact, operate as desired according to Year 2000 requirements. The Company is in various stages of its Year 2000 readiness process at each of its subsidiaries and expects to complete testing of the corrected or replaced systems and be fully Year 2000 ready by July 1999. In addition, the Company is working with its major customers and major vendors, including raw material suppliers and utility companies, to assess their internal state of Year 2000 readiness. These customer and vendor responses are evaluated for any possible risk to, or effect on, the Company's operations and are incorporated into its own detailed Year 2000 readiness assessment. 10 of 13
Costs specifically associated with modifying internal use software for Year 2000 readiness are expensed as incurred but have not been, and are not expected to be, material to the Company's net income. Costs of replacing some of the Company's systems with Year 2000 ready systems have been capitalized as these new systems were acquired for business reasons and not to remediate Year 2000 problems, if any, in the former systems. Based upon the results of Year 2000 readiness efforts underway, the Company believes that all critical information and non-information technology systems and processes will be Year 2000 ready and allow the Company to continue operations beyond the Year 2000 without a material impact on its results of operations or financial position. However, unanticipated problems which may be identified in the ongoing Year 2000 readiness process could result in an undetermined financial risk. Contingency plans to counter these unanticipated problems are being developed as part of the ongoing Year 2000 readiness process. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS No. 133) which requires recognition of the fair value of derivatives in the statement of financial position, with changes in the fair value recognized either in earnings or as a component of other comprehensive income dependent upon the hedging nature of the derivative. Implementation of FAS No. 133 is required for fiscal 2000. The Company does not believe that FAS No. 133 will have a material impact on its earnings or other comprehensive income. Safe Harbor Statement The Company wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995 (the "Act"). Statements by the Company, other than historical information, constitute "forward looking statements" within the meaning of the Act and may be subject to a number of risk factors. Factors that could affect these statements include, but are not limited to, the following: the impact of changing steel prices on the Company's results of operations; changing demand for the Company's products and services; the impact of the Year 2000 problem; and changes in interest or tax rates. 11 of 13
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 1. Exhibits a. Exhibit 3(ii) - Amended and Restated By-Laws of Gibraltar Steel Corporation effective as of August 11, 1998. b. Exhibit 10.1 - Employment Agreement dated July 9, 1998 between Gibraltar Steel Corporation and Brian J. Lipke c. Exhibit 10.2 - Change in Control Agreement dated July 9, 1998 between Gibraltar Steel Corporation and Brian J. Lipke d. Exhibit 10.3 - Form of Change in Control Agreement dated July 9, 1998 between Gibraltar Steel Corporation and certain of the Company's executive officers. e. Exhibit 27 - Financial Data Schedule 2. Reports on Form 8-K. There were no reports on Form 8-K during the three months ended September 30, 1998. 12 of 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GIBRALTAR STEEL CORPORATION (Registrant) By /x/ Brian J. Lipke Brian J. Lipke President, Chief Executive Officer and Chairman of the Board By /x/ Walter T. Erazmus Walter T. Erazmus Treasurer and Chief Financial Officer (Principal Financial and Chief Accounting Officer) Date October 30, 1998 13 of 13