Commission file number 0-22462
Gibraltar Industries, Inc. (Exact name of Registrant as specified in its charter)
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 ______
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.Large accelerated filer ____ Accelerated filer X Non-accelerated filer _____
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).Yes ____ No X
As of May 2, 2006, the number of common shares outstanding was: 29,783,623.
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GIBRALTAR INDUSTRIES, INC.
INDEX
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PART I FINANCIAL INFORMATIONItem 1. Financial StatementsGIBRALTAR INDUSTRIES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except per share data)(unaudited)
See accompanying notes to condensed consolidated financial statements
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GIBRALTAR INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
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GIBRALTAR INDUSTRIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
The accompanying condensed consolidated financial statements as of March 31, 2006 and 2005 have been prepared by Gibraltar Industries, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2006 and 2005 have been included.
Certain information and footnote disclosures including significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements included in the Company’s Annual Report to Shareholders for the year ended December 31, 2005, as filed on Form 10-K.
The consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The results of operations for the three month period ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.
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During the first quarter of 2006, the Company adopted SFAS 123(R) Share-Based Payment, applying the modified prospective method. This statement requires all equity-based payments to employees, including grants of stock options, to be recognized in the statement of income based on the grant date fair value of the award. Under the modified prospective method, the Company is required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. The Company uses the straight-line method of attributing the value of stock-based compensation expense based on vesting.
Stock compensation expense recognized during the period is based on the value of the portion of equity-based awards that is ultimately expected to vest during the period. Vesting requirements vary for directors and executives and key employees.
On May 19, 2005, the Gibraltar Industries, Inc. 2005 Equity Incentive Plan (the “2005 Equity Incentive Plan”) was approved by the Company’s stockholders. The 2005 Equity Incentive Plan is an incentive compensation plan that allows the Company to grant equity-based incentive compensation awards to eligible participants to provide them an additional incentive to promote the business of the Company, to increase their proprietary interest in the success of the Company and to encourage them to remain in the Company’s employ. Awards under the plan may be in the form of options, restricted shares, restricted units, performance shares, performance units and rights. The 2005 Equity Incentive Plan provides for the issuance of up to 2,250,000 shares of common stock. Of the total number of shares of common stock issuable under the plan, the aggregate number of shares that may be issued in connection with grants of restricted stock or restricted units cannot exceed 1,350,000 shares, and the aggregate number of shares which may be issued in connection with grants of incentive stock options and rights cannot exceed 900,000 shares. Vesting terms and award life are governed by the award document.
The Management Stock Purchase Plan (MSPP) was approved by the shareholders in conjunction with the adoption of the 2005 Equity Incentive Plan. The MSPP provides participants the ability to defer up to 50% of their annual bonus under the Management Incentive Compensation Plan. The deferral is converted to restricted stock units and credited to an account along with a match equal to the deferral amount. The account is converted to cash at the current value of the Company’s stock and payable to the participants upon their termination from employment with the Company. The matching portion is payable only if the participant has reached their sixtieth birthday. If a participant terminates prior to age 60, the match is forfeited. Upon termination, the account is converted to a cash account that accrues interest at 2% over the then current 10 year U. S. Treasury note. The account is then paid out in five equal annual cash installments.
During the three months ended March 31, 2006, the Company issued 164,125 restricted stock units, and granted 18,625 non-qualified stock options. At March 31, 2006, 1,782,733 shares were available for issuance under this plan. Of this amount, 902,899 are available for restricted units and 900,000 are available for incentive stock options. The Company recognized compensation expense in connection with the vesting of stock options and the lapse of restrictions on restricted shares and restricted units issued under the 2005 Equity Incentive Plan the amount of $1,361,000 in the three months ended march 31, 2006.
In 1993, the Company adopted an incentive stock option plan, whereby the Company may grant incentive stock options to officers and other key employees. Under this plan, 2,437,500 shares of common stock were reserved for the granting of stock options at an exercise price not less than the fair market value of the shares at the date of grant. Options granted under this plan vest ratably over a four-year period from the grant date and expire ten years after the date of grant. In September 2003, this plan expired. The expiration of this plan did not modify, amend or otherwise affect the terms of any outstanding options on the date of the plan’s expiration.
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In 2003, the Company’s Board of Directors approved the adoption of a new incentive stock option plan, whereby the Company may grant incentive stock options to officers and other key employees. This plan was approved by the shareholders in 2004. Under this plan, 2,250,000 shares of common stock were reserved for the granting of stock options. These options are granted at an exercise price not less than the fair market value of the shares at the date of grant. Options granted under this plan vest ratably over a four-year period from the grant date and expire ten years after the date of grant. As of March 31, 2006, 2,250,000 shares remain available for issuance under this plan, however under the terms of the 2005 Equity Incentive Plan the Company is no longer permitted to issue grants under this plan, and the Company is in the process of terminating this plan.
The Company has a non-qualified stock option plan, whereby the Company may grant non-qualified stock options to officers, employees, non-employee directors and advisers. Under the non-qualified stock option plan, 600,000 shares of common stock were reserved for the granting of options. Options are granted under this plan at an exercise price not less than the fair market value of the shares at the date of grant. These options vest ratably over a four-year period from the grant date and expire ten years after the date of grant. At March 31, 2006, 273,750 shares remain available for issuance under the non-qualified stock option plan.
The Company has a restricted stock plan and has reserved for issuance 375,000 common shares for the grant of restricted stock awards to employees and non-employee directors at a purchase price of $.01 per share. Shares of restricted stock issued under this plan vest on a straight-line basis over a period of 5 to 10 years. No shares were issued under this Plan in 2006 or 2005. At March 31, 2006, 202,500 shares remain available for issuance under the restricted stock plan, however, under the terms of the 2005 Equity Incentive Plan the Company is no longer permitted to issue shares under this plan, and the Company is in the process of terminating this plan. The Company recognized compensation expense of $50,000 and $50,000, respectively in connection with the lapse of restrictions on restricted stock in the three months ended, March 31, 2006 and 2005, respectively.
The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model. The weighed average fair value of the options was $10.43 for options granted during the three months ended March 31, 2006. No options were issued during the three months ended March 31, 2005. The following table provides the assumptions used to value stock options during the three months ended March 31, 2006:
The fair value of restricted stock units granted was based on the grant date market price. During the three months ended March 31, 2006, 94,027 restricted stock units were granted with a weighted average grant date fair value of $25.52 per share. These awards vest ratably over three to four years.
The fair value of restricted stock units held in the MSPP equals the market value of our common stock on the last day of the period. During the three moths ended March 31, 2006, 70,098 restricted stock units were credited to participant accounts. At March 31, 2006, the market value of our common stock was $29.46 per share.
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The table below reflects income from continuing operations and income per share from continuing operations for the three months ended March 31, 2006 compared with the pro forma information for the three months ended March 31, 2005 as follows:
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The following table summarizes the ranges of outstanding and exercisable options at March 31, 2006:
The following table summarizes information about stock option transactions:
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the $29.46 per share market price of the Company’s common stock as of March 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value of exercisable options as of March 31, 2006 was $4,531,000.
The following table summarizes information about restricted stock:
The following table summarizes information about restricted stock units:
As of March 31, 2006, there was $8,287,000 of total unrecognized compensation cost related to non-vested options, restricted shares, and restricted share units. That cost is expected to be recognized over a weighted average period of 2 years and 1 month.
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The changes in shareholders’ equity and comprehensive income consist of (in thousands):
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The cumulative balance of each component of accumulated other comprehensive loss, net of tax, is as follows (in thousands):
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Inventories consist of the following (in thousands):
Basic income per share is based on the weighted average number of common shares outstanding. Diluted income per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under the stock option and restricted stock plans. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.
The following table sets forth the computation of basic and diluted earnings per share as of March 31:
On April 1, 2003, the Company acquired all of the outstanding stock of Construction Metals, Inc. (Construction Metals). Construction Metals is headquartered in Ontario, California and is a manufacturer of a wide array of building and construction products that are sold to retail and wholesale customers throughout the western United States. The acquisition of Construction Metals allowed the Company to eliminate a competitor and strengthen its distribution network in the building products market. The results of operations of Construction Metals (included in the Company’s Building Products segment) have been included in the Company’s consolidated financial statements since the date of acquisition.
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The aggregate purchase consideration for the acquisition of Construction Metals was approximately $29,185,000, which was comprised of approximately $11,685,000 in cash, including direct acquisition costs, and $17,500,000 of unsecured subordinated debt, payable to the former owners of Construction Metals. The purchase price was allocated to the assets acquired and liabilities assumed based upon respective fair market values. The fair market values of the property, plant and equipment and identifiable intangible assets were determined with the assistance of an independent valuation. The identifiable intangible assets consisted of non-competition agreements with an aggregate fair market value of approximately $830,000 (5-year weighted average useful life). The excess consideration over such fair value was recorded as goodwill and aggregated approximately $19,546,000, none of which is deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
As part of the purchase agreement between the Company and the former owners of Construction Metals, the Company may be required to pay additional consideration if certain net sales levels as defined in the purchase agreement are achieved during the period from acquisition up to March 31, 2006. During the second quarter of 2005 and 2004, payments of $1,332,000 and $345,000, respectively, were made as a result of the net sales achieved. These payments were recorded as additional goodwill.
On September 15, 2005, the Company acquired all of the outstanding stock of Curie International (Suzhou) Co., Ltd. (SCM Asia). SCM Asia is located in Suzhou, China and manufactures, markets and distributes non-ferrous metal powder products to customers in a number of different industries, including the powder metallurgy and thermal processing markets. The results of SCM Asia (included in the Company’s Processed Metal Products segment) are included in the Company’s consolidated financial results from the date of acquisition on a one month lag. The acquisition of SCM Asia is not considered significant to the Company’s consolidated results of operations.
The aggregate purchase consideration for the acquisition of SCM Asia was approximately $8,061,000 in cash, a seller note, and acquisition costs. The seller note of $1,465,000 is due on September 15, 2006, and bears no interest. The purchase price was allocated to the assets acquired and liabilities assumed based upon a preliminary valuation of respective fair market values. A final valuation is expected to be completed in the second quarter of 2006. The excess consideration over fair value was recorded as goodwill and aggregated approximately $5,003,000, none of which is deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follow (in thousands):
On September 16, 2005, the Company acquired the net assets of the Gutter Helmet product line (Gutter Helmet). Gutter Helmet manufactures a protection system that is installed over existing full size gutters by professional installers nationwide. The results of Gutter Helmet (included in the Company’s Building Products segment) have been included in the Company’s consolidated financial results from the date of acquisition. The acquisition of Gutter Helmet is not considered to be significant to the Company’s consolidated results of operations.
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The aggregate purchase consideration for the acquisition of Gutter Helmet was approximately $21,436,000 in cash and acquisition costs. The purchase price was allocated to the assets acquired and liabilities assumed based upon respective fair market values. The fair market values of the property, plant and equipment and identifiable intangible assets were determined with the assistance of an independent valuation. The identifiable intangible assets identified during the allocation of purchase price consisted of trademarks with a value of $540,000 (10 year estimated useful life), customer relationships with a value of $400,000 (5 year estimated useful like), and unpatented technology with a value of $365,000 (20 year estimated useful life). The excess consideration over fair value was recorded as goodwill and aggregated approximately $15,740,000, which is fully deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
On October 3, 2005, the Company acquired all the outstanding shares of Alabama Metal Industries Corporation (AMICO). AMICO is headquartered in Birmingham, Alabama, and manufactures, markets and distributes a diverse line of products used in the commercial and industrial sectors of the building products market. The results of operations of AMICO (included in the Company’s Building Products segment) have been included in the Company’s consolidated results of operations from the date of acquisition.
The aggregate purchase consideration for the acquisition of AMICO was approximately $240,945,000 in cash and acquisition costs. The purchase price was allocated to the assets acquired and liabilities assumed based upon a preliminary valuation of respective fair market values. The identifiable intangible assets identified during the preliminary allocation of purchase price consisted of trade name with a value of $21,000,000 (indeterminable useful life) , trademarks with a value of $1,000,000 (10 year estimated useful life), customer relationships with a value of $7,000,000 (10 year estimated useful life), and unpatented technology with a value of $2,000,000 (9 year estimated useful life). A final valuation is expected to be completed in the second quarter of 2006. The excess consideration over fair value was recorded as goodwill and aggregated approximately $115,912,000, none of which is deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
On October 4, 2005, the Company acquired the assets of American Wilson Plastics, Inc. (“American Wilson”), a privately owned manufacturer of custom injected plastic molded products. American Wilcon operates a manufacturing facility in Orrick, Missouri and a distribution facility in Richmond, Missouri. The Company buys a significant portion of American Wilcon’s products, and it acquired American Wilcon to vertically integrate one of its suppliers, expand its manufacturing capabilities and lower its costs. The acquisition of American Wilcon is not considered to be significant to the Company’s consolidated results of operations.
The aggregate purchase consideration for the acquisition of American Wilson was approximately $4,514,000 in cash and acquisition costs. The purchase price was allocated to the assets acquired and liabilities assumed based upon respective fair market values. The fair market values of the property, plant and equipment were determined with the assistance of an independent valuation. The excess consideration over fair value was recorded as goodwill and aggregated approximately $22,000, which is fully deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
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The following unaudited pro forma financial information (in thousands, except for per share data) presents the combined results of operations as if the acquisition of AMICO had occurred on January 1, 2005. The pro forma information includes certain adjustments, including depreciation expense, interest expense and certain other adjustments, together with related income tax effects. 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, 2005 and are not necessarily indicative of future results of the combined companies:
As part of its continuing evaluation of its business, the Company determined that Milcor was not positioned to obtain a leadership position in its marketplace. We were approached by a market leader from Milcor’s marketplace and on January 27, 2005, the Company sold the net assets of its Milcor subsidiary, which included Portals Plus, for approximately $42,594,000. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations for Milcor have been classified as discontinued operations in the condensed consolidated statements of income and the condensed consolidated statements of cash flows for all periods presented. The carrying amounts of the assets and liabilities sold were as follows (in thousands):
The Company retained a liability related to a multi-employer pension plan to fund the terminated pensions of the union employees of Milcor. We have accrued $59,000 for the termination based on the information that is available. The administrator of the plan has engaged the plan’s actuary to measure the Company’s withdrawal liability as of January 27, 2005. The plan’s administrator expects to have this valuation completed during the next quarter.
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The results of operations for Milcor for the current and prior period have been classified as discontinued operations in the condensed consolidated statements of income. Components of the income from discontinued operations of Milcor for the three months ended March 31 are as follows (in thousands):
Goodwill
The changes in the approximate carrying amount of goodwill by reportable segment for the three months ended March 31, 2006 is as follows (in thousands):
Intangible Assets
At March 31, 2006, intangible assets related to the Company’s acquisitions are included as part of the total other assets on the Company’s condensed consolidated balance sheet. Intangible assets subject to amortization at March 31, 2006 are as follows (in thousands):
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Intangible assets with indefinite useful lives not subject to amortization consist of a trade name and trademark valued at $21,440,000.
Intangible asset amortization expense for the three month periods ended March 31, 2006 and 2005 aggregated approximately $504,000 and $218,000, respectively.
Amortization expense related to intangible assets for the remainder of fiscal 2006 and the next five years thereafter is estimated as follows (in thousands):
The Company is organized into three reportable segments on the basis of the production process and products and services provided by each segment, identified as follows:
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The following table illustrates certain measurements used by management to assess the performance of the segments described above (in thousands):
*includes assets associated with the discontinued operations.
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In connection with the acquisition of Construction Metals, the Company entered into two unsecured subordinated notes payable each in the amount of $8,750,000 (aggregate total of $17,500,000). These notes are payable to the two former owners of Construction Metals and are considered related party in nature due to the former owners’ current employment relationship with the Company. These notes are payable in annual principal installments of $2,917,000 per note on April 1, with the final principal payment due on April 1, 2006. These notes require quarterly interest payments at an interest rate of 5.0% per annum. At March 31, 2006 and 2005, the current portion of these notes aggregated approximately $5,833,000.
Accrued interest and interest expense related to these notes payable was approximately $72,000 and $144,000 as of and for the three months ended March 31, 2006 and 2005, respectively.
The Company has certain operating lease agreements related to operating locations and facilities with the former owners of Construction Metals or companies controlled by these parties. These operating leases are considered to be related party in nature. Rental expense associated with these related party operating leases aggregated approximately $388,000 and $403,000 for the three months ended March 31, 2006 and 2005, respectively.
Two members of our Board of Directors are partners in law firms that provide legal services to the Company. For the three months ended March 31, 2006 and 2005, the Company incurred $356,000 and $74,000, respectively, for legal services from these firms. Of the amount incurred, $249,000 and $74,000, was expensed during the three months ended March 31, 2006 and 2005 respectively. $107,000 was capitalized as acquisition costs and deferred debt issuance costs during the three months ended March 31, 2006.
The aggregate borrowing limit under the Company’s revolving credit facility is $300,000,000. At March 31, 2006, the Company had $270,497,000 availability under the revolving credit facility.
The following table presents the components of net periodic pension and other postretirement benefit costs charged to expense for the three months ended March 31 (in thousands):
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13. SUPPLEMENTAL FINANCIAL INFORMATION
The following information sets forth the consolidating summary financial statements of the issuer (Gibraltar Industries, Inc.) and guarantors, which guarantee the 8% senior subordinated notes due December 1, 2015, and the non-guarantors. The guarantors are wholly owned subsidiaries of the issuer and the guarantees are full, unconditional, joint and several.
Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries and non-guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
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Gibraltar Industries, Inc.Consolidating Balance Sheets March 31, 2006 (in thousands)
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Gibraltar Industries, Inc.Consolidating Balance Sheets December 31, 2005 (in thousands)
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Gibraltar Industries, Inc.Consolidating Statements of Income Three Months Ended March 31, 2006 (in thousands)
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Gibraltar Industries, Inc.Consolidating Statements of Income Three Months Ended March 31, 2005 (in thousands)
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Gibraltar Industries, Inc.Consolidating Statements of Cash Flows Three Months Ended March 31, 2006 (in thousands)
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Gibraltar Industries, Inc.Consolidating Statements of Cash Flows Three Months Ended March 31, 2005 (in thousands)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.
Executive Summary
The condensed consolidated financial statements present the financial condition of the Company as of March 31, 2006 and December 31, 2005, and the condensed consolidated statements of income and cash flows of the Company for three months ended March 31, 2006 and 2005.
The Company is organized into three reportable segments – Building Products, Processed Metal Products and Thermal Processing. The Company also held equity positions in two joint ventures as of March 31, 2006.
The Building Products segment processes primarily sheet steel, aluminum and other materials to produce a wide variety of building and construction products. This segment’s products are sold to major retail home centers, such as The Home Depot, Lowe’s, Menards and Wal-Mart, wholesale distributors, and metal service centers.
The Processed Metal Products segment produces a wide variety of cold-rolled strip steel products, coated sheet steel products, powdered metal products and strapping products. This segment primarily serves the automotive industry’s leaders, such as General Motors, Ford, DaimlerChrysler and Honda. This segment also serves the automotive supply and commercial and residential metal building industry, as well as the power and hand tool and hardware industries.
The Thermal Processing segment provides a wide array of processes which refine the metallurgical properties of customer-owned metal products for a variety of consumer and industrial applications where critical performance characteristics are required. This segment services such customers as Ford Motor Company, General Motors, Getrag, and Eaton Corporation.
As part of its continuing evaluation of its business, the Company determined that Milcor was not positioned to obtain a leadership position in its marketplace. We were approached by a market leader from Milcor’s marketplace and sold the net assets of our Milcor subsidiary to this market leader. The transaction was finalized on January 27, 2005. The results of the operations of Milcor have been reclassified as discontinued operations in the Company’s income and cash flow statements for all periods presented.
The following table sets forth the Company’s net sales by reportable segment for the three months ending March 31 (in thousands):
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Results of Operations
Consolidated
Net sales increased by approximately $86.8 million, or 31.7% to $360.4 million for the quarter ended March 31, 2006, from net sales of $273.6 million for the quarter ended March 31, 2005. The increase in net sales was the result of the acquisition of AMICO (acquired October 3, 2005) which contributed $89.2 million in net sales in the current quarter. The remaining building products operations along with our thermal processing segment also experienced net sales growth due to both volume and pricing increases. The processed metal products segment experienced a decline in net sales due to lower volumes and to a lesser extent lower selling prices, a function of competitive pressure in the strip steel market.
Gross profit as a percentage of net sales increased to 19.8% for the quarter ended March 31, 2006, from 18.3% for the quarter ended March 31, 2005. The increase in gross profit percentage was primarily the result of the addition of the results of AMICO, with the remaining increase due to an approximately 2% decrease in material costs as a percentage of net sales, which was partially offset by increases in energy and transportation as a percentage of net sales of approximately 0.5% each, as compared to the same period in the prior year.
Selling, general and administrative expenses increased by approximately $11.3 million, or 38.7%, to $40.6 million for the quarter ended March 31, 2006, from $29.2 million for the quarter ended March 31, 2005. The dollar increase in selling, general and administrative expenses was due primarily to the acquisition of AMICO, which provided $6.6 million of additional costs in the current quarter. The remaining dollar increase was due to increases in employee incentive plans and increased amortization of identifiable intangible assets, due to the 2005 acquisitions. Selling, general and administrative expenses as a percentage of net sales increased to 11.3% for the quarter ended March 31, 2006, from 10.7% for the quarter ended March 31, 2005 as a result of these items.
As a result of the above, income from operations as a percentage of net sales for the quarter ended March 31, 2006 increased to 8.6% from 7.6% for the prior year’s comparable period.
Interest expense increased by approximately $4.1 million to $8.0 million for the quarter ended March 31, 2006, from $3.9 million for the quarter ended March 31, 2005. The increase in interest expense during the current quarter was due primarily to higher average debt balances, primarily due to the acquisition of AMICO, and higher overall interest rates compared to that of the prior year’s first quarter, primarily a result of the issuance of the 8% Senior Subordinated Notes in December 2005.
As a result of the above, income from continuing operations before taxes increased by approximately $6.2 million, or 35.5%, to $23.6 million for the quarter ended March 31, 2006, from income from continuing operations before taxes of $17.4 million for the quarter ended March 31, 2005.
Income taxes for the quarter ended March 31, 2006 approximated $9.2 million and were based on a 39.0% effective tax rate, consistent with the effective tax rate for the same period in 2005.
The following provides further information by segment:
Building Products
Net sales increased by approximately $95.6 million, or 80.2%, to $214.7 million for the quarter ended March 31, 2006, from net sales of $119.2 million for the quarter ended March 31, 2005. Excluding the $89.2 million provided by AMICO, the increase in net sales was $6.3 million, or 5.4% from the same period in the prior year, a result of both volume and selling price increases.
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Income from operations as a percentage of net sales increased to 14.6% for the quarter ended March 31, 2006 from 8.8% for the prior year’s comparable period. The increase in operating margin percentage was due to the addition of AMICO, which obtained a seasonally high operating margin due to increased sales levels, along with a significant improvement in the operating characteristics of our other building products operations. The improvement in our pre-existing operations was driven by a 4.2% decrease in raw material costs as a percentage of sales partially offset by an increase of 0.5% in labor costs as a percentage of net sales.
Processed Metal Products
Net sales decreased by approximately $11.7 million, or 9.2%, to $115.9 million for the quarter ended March 31, 2006, from net sales of $127.6 million for the quarter ended March 31, 2005. The decrease in net sales was primarily a function of lower sales volumes and selling prices in our strip steel business, primarily due to competitive pressure in this market. The decline in net sales was partially offset by increased net sales in our powdered metal products business, a result of increased selling price due to the increase in the market price of copper, as well as increased volumes.
Income from operations as a percentage of net sales decreased to 5.8% of net sales for the quarter ended March 31, 2006 from 11.0% for the prior year’s comparable period. The decrease in operating margin percentage was due primarily to lower volumes combined with a 2.9% increase in material costs and a 1.0% increase in labor costs as a percentage of net sales, partially offset by 0.8% decrease in incentive compensation costs.
Thermal Processing
Net sales increased by approximately $2.9 million, or 10.9%, to $29.7 million for the quarter ended March 31, 2006, from net sales of $26.8 million for the quarter ended March 31, 2005. The increase in net sales was due to increases in volume due to strategic investments that have yielded $1.1 million in new business at a single location along with slight selling price and volume increases across our other locations.
Income from operations as a percentage of net sales increased to 15.7% for the quarter ended March 31, 2006 from 12.7% for the prior year’s comparable period. The increase in operating margin percentage was due primarily to the increase in new business together with a 2.2% decrease in labor and fringe costs as a percentage of sales. The increase in operating margin percentage was partially offset by a 2.0% increase in energy costs during the current quarter.
Outlook
The outlook for the quarter ended June 30, 2006 is favorable in comparison to the quarter ended June 30, 2005. The second quarter is historically one of the seasonally strongest periods of the Company’s fiscal cycle. The Company believes it is positioned to benefit from many of its cost reduction programs and internal growth initiatives, as well as continuing operational improvements.
In 2006 the Company will realize a full year’s worth of sales and earnings from the 2005 acquisition of AMICO, along with SCM Asia, Gutter Helmet and American Wilcon. In addition, the Company is continuously evaluating numerous acquisition opportunities.
Liquidity and Capital Resources
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.
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The Company’s shareholders’ equity increased by approximately $15.0 million or 3.0%, to $509.0 million, at March 31, 2006. This increase in shareholder’s equity was primarily due to net income of 14.4 million, the increase in the market value of our interest rate swaps of $0.8 million, equity compensation of $0.7 million, and proceeds of $0.5 million from the exercise of stock options, partially offset by the declaration of approximately $1.5 million in shareholder dividends.
During the first quarter of 2006, the Company’s working capital increased by approximately $11.0 million, or 4.1%, to approximately $277.8 million. This increase in working capital was primarily the result of increases in accounts receivable and inventory levels of $33.2 million and $16.1 million, respectively, partially offset by a $19.2 million decrease in cash and a $19.2 million increase in accounts payable and accrued expenses. The increase in receivables is the result of increased sales levels, while the increase in inventories is the result of our normal inventory buildup in anticipation of what has historically been the Company’s strongest season. The increase in payables and accrued expenses is due primarily to the timing of purchases of raw materials to build inventory.
Net cash used in operating activities for the three months ended March 31, 2006 was approximately $3.6 million and was primarily the result of net income from continuing operations of $14.4 million combined with depreciation and amortization of $8.9 million, increases in accounts receivable, inventories, and accounts payable of $33.3 million, $16.1 million, and $15.4 million, respectively.
The cash on hand at the beginning of the period and cash generated by the exercise of stock options of $0.5 million was used to fund current operations, capital expenditures of $6.4 million, long-term debt reduction of $8.3 million and pay cash dividends of $1.5 million.
Senior credit facility and senior subordinated notes
The Company’s credit agreement provides a revolving credit facility, which expires in December 2010, and a term loan, which is due in December 2012. The revolving credit facility of up to $300.0 million and the term loan of $230.0 million are secured with the Company’s accounts receivable, inventories and personal property and equipment. At March 31, 2006, the Company had used approximately $17.3 million of the revolving credit facility and had letters of credit outstanding of $12.2 million, resulting in $270.5 million in availability. Borrowings under the revolving credit facility carry interest at LIBOR plus a fixed rate. The weighted average interest rate of these borrowings was 6.12% at March 31, 2006. At March 31, 2006, the term loan balance was $229.4 million. Borrowings under the term loan carry interest at LIBOR plus a fixed rate. The rate in effect on March 31, 2006 was 6.69%.
The Company’s $204.0 million of 8% senior subordinated notes were issued in December 2005 at a discount to yield 8.25% Provisions of the 8% notes include, without limitation, restrictions on indebtedness liens, distributions from restricted subsidiaries, asset sales, affiliate transactions, dividends and other restricted payments. Prior to December 1, 2008, up to 35% of the 8% notes are redeemable at the option of the Company from the proceeds of an equity offering at a premium of 108% of the face value, plus accrued and unpaid interest. After December 1, 2010 the notes are redeemable at the option of the Company, in whole or in part, at the redemption price (as defined in the notes agreement), which declines annually from 104% to 100% on and after December 1, 2013. In the event of a Change of Control (as defined in the indenture for such notes), each holder of the 8% Notes may require the Company to repurchase all or a portion of such holder’s 8% Notes at a purchase price equal to 101% of the principal amount thereof. The 8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements.
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The Company’s various loan agreements, which do not require compensating balances, contain provisions that limit additional borrowings and require maintenance of minimum net worth and financial ratios. At March 31, 2006 the Company was in compliance with terms and provisions of all of its financing agreements.
For the second quarter and remainder of 2006, the Company is focused on maximizing positive cash flow, working capital management, and debt reduction. As of March 31, 2006, the Company believes that availability of funds under its existing credit facility together with the cash generated from operations will be sufficient to provide the Company with the liquidity and capital resources necessary to support its principal capital requirements, including operating activities, capital expenditures, and dividends.
The Company regularly considers various strategic business opportunities including acquisitions. The Company evaluates such potential acquisitions on the basis of their ability to enhance the Company’s existing products, operations, or capabilities, as well as provide access to new products, markets and customers. Although no assurances can be given that any acquisition will be consummated, the Company may finance such acquisitions through a number of sources including internally available cash resources, new debt financing, the issuance of equity securities or any combination of the above.
Critical Accounting Policies
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
A summary of the Company’s significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included in the Company’s Annual Report to Shareholders for the year ended December 31, 2005, as filed on Form 10-K.
There have been no changes in critical accounting policies in the current year from those described in our 2005 Form 10-K.
Related Party Transactions
In connection with the acquisition of Construction Metals in April 2004, the Company entered into two unsecured subordinated notes payable, each in the amount of $8.75 million (aggregate total of $17.5 million). These notes are payable to the former owners of Construction Metals and are considered related party in nature due to the former owners’ current employment relationship with the Company. These notes are payable in equal annual principal installments of approximately $2.9 million per note on April 1 with the final principal payment due on April 1, 2006. These notes require quarterly interest payments at an interest rate of 5.0% per annum. Accrued interest and interest expense related to these notes payable was approximately $72,000 as of and for the three months ended March 31, 2006. At March 31, 2006, the current portion of these notes payable aggregated approximately $5.8 million.
The Company has certain operating lease agreements related to operating locations and facilities with the former owners of Construction Metals (related parties) or companies controlled by these parties. Rental expense associated with these related party operating leases aggregated approximately $388,000 for the three months ended March 31, 2006.
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Two members of our Board of Directors are partners in law firms that provide legal services to the Company. As of, and for the three months ended March 31, 2006, we incurred $356,000 for legal services from these firms. Of the amount incurred, $249,000 was expensed and $107,000 was capitalized as acquisition costs and deferred debt issuance costs during the three months ended March 31, 2006.
Forward-Looking Information – Safe Harbor Statement
Certain information set forth herein contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company’s business, and management’s beliefs about future operating results and financial position. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Statements by the Company, other than historical information, constitute “forward looking statements” as defined within the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements. 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; changes in raw material pricing and availability; changing demand for the Company’s products and services; and changes in interest or tax rates. In addition, such forward-looking statements could also be affected by general industry and market conditions, as well as general economic and political conditions.
The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law or regulation.
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Item 3. Qualitative and Quantitative Disclosures About Market Risk
In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition and raw materials pricing and availability. In addition, the Company is exposed to market risk, primarily related to its long-term debt. To manage interest rate risk, the Company uses both fixed and variable interest rate debt. There have been no material changes to the Company’s exposure to market risk since December 31, 2005.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures contained in this report. The Company’s Chief Executive Officer and Chairman of the Board, President and Chief Operating Officer, and Executive Vice President, Chief Financial Officer, and Treasurer evaluated the effectiveness of the Company’s disclosure controls as of the end of the period covered in this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chairman of the Board, President and Chief Operating Officer, Executive Vice President, Chief Financial Officer, and Treasurer, have concluded that the Company’s disclosure controls and procedures were designed and functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
The Company converted its existing legacy manufacturing and accounting system to an integrated ERP system at two of its subsidiaries during the quarter ended March 31, 2006. The Company converted another subsidiary to this same system in the second quarter of 2005. The completion of this system implementation at these subsidiaries should enhance our internal controls as follows:
The Company imposed mitigating and redundant controls where changes to certain processes were underway and not completed.
There have been no other changes in the Company’s internal control over financial reporting (as defined by Rule 13a-15(f) that occurred during the period covered by the report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
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Item 6. Exhibits.
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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.
Date: May 10, 2006
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