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 March 31, 1999 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 March 31, 1999, the number of common shares outstanding was: -- 12,514,131. 1 of 14
GIBRALTAR STEEL CORPORATION INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1999 (unaudited) and December 31, 1998 (audited) 3 Condensed Consolidated Statements of Income Three months ended March 31, 1999 and 1998 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Three months ended March 31, 1999 and 1998 (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 - 12 PART II. OTHER INFORMATION 13 2 of 14
PART I. FINANCIAL INFORMATION Item 1. Financial Statements GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) March 31, December 31, 1999 1998 (unaudited) (audited) Assets Current assets: Cash and cash equivalents $ 5,578 $ 1,877 Accounts receivable 80,808 71,070 Inventories 90,971 99,351 Other current assets 3,944 3,536 Total current assets 181,301 175,834 Property, plant and equipment, net 177,575 176,221 Other assets 86,211 86,380 $ 445,087 $ 438,435 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 44,646 $ 38,601 Accrued expenses 12,708 11,646 Current maturities of long-term debt 1,333 1,351 Total current liabilities 58,687 51,598 Long-term debt 193,558 199,395 Deferred income taxes 25,849 25,289 Other non-current liabilities 1,963 1,845 Shareholders' equity Preferred shares - - Common shares 125 125 Additional paid-in capital 66,984 66,613 Retained earnings 97,921 93,570 Total shareholders' equity 165,030 160,308 $ 445,087 $ 438,435 ======== ======== See accompanying notes to financial statements 3 of 14
GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) Three Months Ended March 31, 1999 1998 (unaudited) Net sales $ 143,804 $ 116,383 Cost of sales 115,386 96,223 Gross profit 28,418 20,160 Selling, general and administrative expense 16,735 11,686 Income from operations 11,683 8,474 Interest expense 3,319 1,606 Income before taxes 8,364 6,868 Provision for income taxes 3,387 2,747 Net income $ 4,977 $ 4,121 ========= ========= Net income per share-Basic $ .40 $ .33 ========= ========= Weighted average shares outstanding-Basic 12,496 12,410 ========= ========= Net income per share-Diluted $ .39 $ .33 ========= ========= Weighted average shares outstanding-Diluted 12,712 12,608 ========= ========= See accompanying notes to financial statements 4 of 14
GIBRALTAR STEEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Three Months Ended March 31, 1999 1998 (unaudited) Cash flows from operating activities Net income $ 4,977 $ 4,121 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,021 2,561 Provision for deferred income taxes 731 336 Undistributed equity investment income (210) (209) Other noncash adjustments 29 - Increase (decrease) in cash resulting from changes in (net of acquisitions): Accounts receivable (9,738) (9,723) Inventories 8,380 (7,176) Other current assets (595) (882) Accounts payable and accrued expenses 7,226 6,709 Other assets (250) (222) Net cash provided by (used in) operating activities 14,571 (4,485) Cash flows from investing activities Acquisitions, net of cash acquired - (35,040) Purchases of property, plant and equipment (4,878) (4,338) Net proceeds from sale of property and equipment 147 65 Net cash used in investing activities (4,731) (39,313) Cash flows from financing activities Long-term debt reduction (19,808) (2,101) Proceeds from long-term debt 13,953 44,394 Payment of dividends (626) - Net proceeds from issuance of common stock 342 5 Net cash (used in) provided by financing activities (6,139) 42,298 Net increase (decrease) in cash and cash equivalents 3,701 (1,500) Cash and cash equivalents at beginning of year 1,877 2,437 Cash and cash equivalents at end of period $ 5,578 $ 937 ======= ======= See accompanying notes to financial statements 5 of 14
GIBRALTAR STEEL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements as of March 31, 1999 and 1998 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 March 31, 1999 and 1998 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, 1998. The results of operations for the three month period ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Inventories consist of the following: (in thousands) March 31, December 31, 1999 1998 (unaudited) (audited) Raw material $ 55,428 $ 60,665 Finished goods and work-in-process 35,543 38,686 Total inventories $ 90,971 $ 99,351 ======= ======= 6 of 14
3. STOCKHOLDERS' EQUITY The changes in stockholders' equity consist of: (in thousands) Additional Common Shares Paid-in Retained Shares Amount Capital Earnings December 31, 1998 12,484 $ 125 $ 66,613 $ 93,570 Net Income - - - 4,977 Stock options exercised 30 - 342 - Earned portion of restricted stock - - 29 - Cash dividends-$.05 per share - - - (626) March 31, 1999 12,514 $ 125 $ 66,984 $ 97,921 ==================================== 4. EARNINGS PER SHARE Basic net income per share equals net income divided by the weighted average shares outstanding for the three months ended March 31, 1999 and 1998. 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 1999 $ 4,977,000 12,495,969 $ .40 12,712,487 $ .39 1998 $ 4,121,000 12,409,776 $ .33 12,608,138 $ .33 Included in diluted shares are common stock equivalents relating to options of 216,518 and 198,362 for 1999 and 1998, respectively. 5. ACQUISITIONS On October 1, 1998, the Company purchased all the outstanding capital stock of Harbor Metal Treating Co., Inc. and its affiliates (Harbor) for $13.5 million in cash. Harbor provides metallurgical heat treating services in which customer-owned parts are exposed to precise temperature and other conditions to improve their material properties, strength and durability. 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 14
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. These acquisitions have been accounted for under the purchase method. Results of operations of Harbor, USP, Appleton and Solar 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 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, 1998. 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, 1998 and are not necessarily indicative of future results of the combined companies. (in thousands, except per share data) Three Months Ended March 31, 1998 (unaudited) Net sales $ 140,588 ======== Income before taxes $ 7,431 ======== Net income $ 4,410 ======== Net income per share-Basic $ .36 ======== 8 of 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales increased $27.4 million, or 23.6%, to $143.8 million for the first quarter ended March 31, 1999 from $116.4 million for the prior year's first quarter. This increase resulted from including net sales of The Solar Group (acquired March 1, 1998), Appleton Supply Company (acquired April 1, 1998), United Steel Products (acquired June 1, 1998) and Harbor Metal Treating Co. (acquired October 1, 1998) (collectively, the 1998 Acquisitions) from their respective acquisition dates with the net sales at the Company's existing operations, and from sales growth at existing operations. Cost of sales as a percentage of net sales decreased to 80.2% from 82.7% for the prior year's first quarter. Gross profit as a percentage of net sales increased to 19.8% from 17.3% for the prior year's first quarter. This improvement was primarily due to the 1998 acquisitions, which have historically generated higher margins than the Company's existing operations, and due to lower raw material costs at existing operations. Selling, general and administrative expenses as a percentage of net sales increased to 11.6% for the first quarter ended March 31, 1999 from 10.0% for the same period of 1998. This increase was primarily due to higher costs as a percentage of sales attributable to the 1998 Acquisitions and performance based compensation linked to the Company's sales and profitability. Interest expense for the first quarter ended March 31, 1999 increased by $1.7 million from the same period in 1998 primarily due to higher borrowings to finance 1998 Acquisitions and capital expenditures. As a result of the above, income before taxes increased by $1.5 million for the first quarter ended March 31, 1999 from the same period of 1998. Income taxes for the first quarter ended March 31, 1999 approximated $3.4 million and were based on a 40.5% effective tax rate compared to an effective tax rate of 40.0% for the same period in 1998. Liquidity and Capital Resources During the first three months of 1999, the Company's working capital decreased slightly to $122.6 million. Additionally, shareholders' equity increased by $4.7 million at March 31, 1999 to $165.0 million. 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 14
Net cash provided by operations of $14.6 million resulted primarily from net income of $5.0 million, depreciation and amortization of $4.0 million, an increase in accounts payable and accrued expenses of $7.2 million and a decrease in inventory of $8.4 million, offset by an increase in accounts receivable of $9.7 million necessary to service increased sales levels. The $14.6 million of net cash provided by operations was used to fund capital expenditures of $4.9 million and cash dividends of $.6 million and to pay down $5.9 million of the Company's credit facility. At March 31, 1999 the Company's aggregate credit facilities available approximated $243 million, with borrowings of approximately $194 million and an additional availability of approximately $49 million. 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. Impact of Year 2000 The Year 2000 issue concerns computer hardware and software being able to distinguish between the year 1900 and the year 2000 and the resultant effect on operations. The Company has conducted a detailed assessment of all of its information technology and non-information technology hardware and software with regard to Year 2000 issues, with special emphasis on mission critical hardware and software. The Company's plan to ensure that its systems are Year 2000 ready is comprised of: inventorying all processes and systems which may have a date-related component and identifying those which are not Year 2000 ready; remediating (i.e., correcting or replacing) those systems which are not Year 2000 ready; and testing the remediated 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. Information technology and non-information technology hardware and software have been inventoried and those not Year 2000 ready have been identified. Mission critical processes and systems have been given priority for remediation and testing. Therefore, the Company expects to be fully Year 2000 ready with all such mission critical processes and systems by July 1999. The following table summarizes the status as of March 31, 1999 of the Year 2000 efforts with respect to identified items that may materially impact operations. 10 of 14
Estimated current completion % and month of expected completion: Area Inventorying & Assessment Remediation & Testing % Expected % Expected Complete Completion Complete Completion IT Hardware and Software: Financial 100% Complete 95% Complete Non-Financial 100% Complete 60% July 1999 Non-IT Hardware and Software 100% Complete 85% July 1999 Third-Party Systems* 100% July 1999 * * Products N/A N/A N/A N/A * The Company has third party relationships with numerous large customers and vendors, including raw material suppliers and utility companies, many of which are publicly traded corporations subject to disclosure requirements. The Company continues to communicate with these third parties to assess their internal state of Year 2000 readiness and monitors Year 2000 disclosures in their SEC filings. These third party communications and disclosures are then evaluated for possible risk to, or effect on, the Company's operations and are incorporated into the Company's own detailed Year 2000 readiness assessment. 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. The Company has budgeted approximately $750,000 to remediate its affected systems, of which approximately $250,000 was expensed through March 31, 1999. 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 and internal audit processes underway, the Company believes that all mission critical information and non-information technology systems and processes will 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. A worst case scenario could include the possible shut down of an operation for a period of time. However, in that event, customer orders may be serviced through use of other Company owned facilities with similar manufacturing capabilities and inventories or, alternatively, by out-sourcing some manufacturing to third parties. The Company's Year 2000 readiness process includes contingency planning for all mission critical issues in order to minimize such a risk to the Company. Detailed contingency plans will be finalized during the third quarter of 1999, after the results of the assessment, remediation and testing have been completed. 11 of 14
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 issue; and changes in interest or tax rates. 12 of 14
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 1. Exhibits a. Exhibit 10.1 - Gibraltar Steel Corporation Incentive Stock Option Plan Fourth Amendment and Restatement 2. Reports on Form 8-K. There were no reports on Form 8-K during the three months ended March 31, 1999. 13 of 14
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 April 23, 1999 14 of 14