FORM 10-Q/A10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
(Mark one)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20042005
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 CorporationIndustries, Inc.
(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) 826-6500826-6500----
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X . No __.
As of June 30, 2004,August 1, 2005, the number of common shares outstanding was: 19,624,200.
29,667,686.
GIBRALTAR STEEL CORPORATION
INDUSTRIES, INC.
INDEX
| PAGE NUMBER | |
PART 1. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements (unaudited) |
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| Condensed Consolidated Balance Sheets as of | 3 |
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| Condensed Consolidated Statements of Income | 4 |
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| Condensed Consolidated Statements of Cash Flows | 5 |
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| Notes to Condensed Consolidated Financial Statements | 6-16 |
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Item 2. | Management's Discussion and Analysis of | 17-23 |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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PART II. | OTHER INFORMATION |
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The Registrant hereby amends its 10-Q for the Quarterly period ended June 30, 2004 to add Exhibit 10.1 which was inadvertently not appended to the filing.
PART I FINANCIAL INFORMATION | |||||
(in thousands, except per share data) | |||||
| |||||
|
| June 30, December 31, | |||
|
| 2004 |
|
| 2003 |
|
| (unaudited) |
|
| (audited) |
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 10,297 |
| $ | 29,019 |
Accounts receivable, net |
| 162,863 |
|
| 102,591 |
Inventories |
| 141,233 |
|
| 107,531 |
Other current assets |
| 11,204 |
|
| 10,309 |
Total current assets |
| 325,597 |
|
| 249,450 |
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|
|
|
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Property, plant and equipment, net |
| 265,978 |
|
| 250,029 |
Goodwill |
| 280,853 |
|
| 267,157 |
Investments in partnerships |
| 6,643 |
|
| 5,044 |
Other assets |
| 5,924 |
|
| 6,063 |
| $ | 884,995 |
| $ | 777,743 |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable | $ | 76,065 |
| $ | 49,879 |
Accrued expenses |
| 42,948 |
|
| 29,029 |
Current maturities of long-term debt |
| 19,192 |
|
| 19,848 |
Total current liabilities |
| 138,205 |
|
| 98,756 |
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Long-term debt |
| 255,711 |
|
| 222,402 |
Deferred income taxes |
| 59,992 |
|
| 55,982 |
Other non-current liabilities |
| 5,553 |
|
| 6,422 |
Shareholders' equity: |
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Preferred stock, $.01 par value; authorized: 10,000,000 shares; none outstanding |
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Common stock, $.01 par value; authorized 50,000,000 shares; issued 19,651,200 and 19,274,069 shares in 2004 and 2003, respectively |
|
196 |
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|
193 |
Additional paid-in capital |
| 207,053 |
|
| 199,206 |
Retained earnings |
| 219,063 |
|
| 196,138 |
Unearned compensation |
| (648) |
|
| (818) |
Accumulated other comprehensive loss |
| (130) |
|
| (538) |
|
| 425,534 |
|
| 394,181 |
Less: cost of 27,000 and 19,000 common shares held in treasury in |
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Total shareholders' equity |
| 425,534 |
|
| 394,181 |
| $ | 884,995 |
| $ | 777,743 |
See accompanying notes to condensed consolidated financial statements
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GIBRALTAR STEEL CORPORATION
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| Three Months Ended | Six Months Ended | |||||||||||
|
| 2004 |
| 2003 |
| 2004 |
| 2003 | |||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) |
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Net sales | $ | 257,485 | $ | 203,406 | $ | 469,480 | $ | 364,938 | |||||
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Cost of sales |
| 199,183 |
| 162,902 |
| 368,418 |
| 295,359 | |||||
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Gross profit |
| 58,302 |
| 40,504 |
| 101,062 |
| 69,579 | |||||
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Selling, general and administrative expense |
| 30,721 |
| 23,185 |
| 55,272 |
| 41,618 | |||||
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Income from operations |
| 27,581 |
| 17,319 |
| 45,790 |
| 27,961 | |||||
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Other (income) expense: |
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| |||||
Equity in partnerships' income |
| (1,186) |
| (137) |
| (1,726) |
| (208) | |||||
Interest expense |
| 3,239 |
| 3,704 |
| 6,542 |
| 6,244 | |||||
Total other expense |
| 2,053 |
| 3,567 |
| 4,816 |
| 6,036 | |||||
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Income before taxes |
| 25,528 |
| 13,752 |
| 40,974 |
| 21,925 | |||||
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Provision for income taxes |
| 10,084 |
| 5,501 |
| 16,185 |
| 8,770 | |||||
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Net income | $ | 15,444 | $ | 8,251 | $ | 24,789 | $ | 13,155 | |||||
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Net income per share - Basic | $ | .79 | $ | .52 | $ | 1.27 | $ | .83 | |||||
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Weighted average shares outstanding - Basic |
| 19,539 |
| 15,938 |
| 19,485 |
| 15,925 | |||||
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Net income per share - Diluted | $ | .78 | $ | .51 | $ | 1.26 | $ | .82 | |||||
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Weighted average shares outstanding - Diluted |
| 19,703 |
| 16,103 |
| 19,641 |
| 16,086 | |||||
PART I FINANCIAL INFORMATION | |||||
(in thousands, except per share data) | |||||
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|
| June 30 |
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| December 31 |
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| (unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | 7,025 |
| $ | 10,892 |
Accounts receivable, net |
| 171,940 |
|
| 146,021 |
Inventories |
| 199,061 |
|
| 207,215 |
Other current assets |
| 11,825 |
|
| 15,479 |
Total current assets |
| 389,851 |
|
| 379,607 |
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Property, plant and equipment, net |
| 254,643 |
|
| 269,019 |
Goodwill |
| 269,881 |
|
| 285,927 |
Investments in partnerships |
| 7,753 |
|
| 8,211 |
Other assets |
| 14,148 |
|
| 14,937 |
| $ | 936,276 |
| $ | 957,701 |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable | $ | 65,001 |
| $ | 70,775 |
Accrued expenses |
| 51,305 |
|
| 51,885 |
Current maturities of long-term debt |
| 8,860 |
|
| 8,859 |
Current maturities of related party debt |
| 5,833 |
|
| 5,833 |
Total current liabilities |
| 130,999 |
|
| 137,352 |
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Long-term debt |
| 257,915 |
|
| 289,514 |
Long-term related party debt |
| - |
|
| 5,833 |
Deferred income taxes |
| 64,412 |
|
| 66,485 |
Other non-current liabilities |
| 5,065 |
|
| 4,774 |
Shareholders' equity: |
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Preferred stock, $.01 par value; authorized: 10,000,000 shares; none outstanding |
| - |
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| - |
Common stock, $.01 par value; authorized 50,000,000 shares; issued 29,707,186 and 29,665,780 shares in 2005 and 2004, respectively |
| 297 |
|
| 297 |
Additional paid-in capital |
| 216,488 |
|
| 209,765 |
Retained earnings |
| 265,834 |
|
| 242,585 |
Unearned compensation |
| (6,313) |
|
| (572) |
Accumulated other comprehensive loss |
| 1,579 |
|
| 1,668 |
|
| 477,885 |
|
| 453,743 |
Less: cost of 40,500 common shares held in treasury in 2005 and 2004 |
| - |
|
| - |
Total shareholders' equity |
| 477, 885 |
|
| 453,743 |
| $ | 936,276 |
| $ | 957,701 |
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GIBRALTAR INDUSTRIES, INC. | |||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Net sales | $ | 288,388 | $ | 249,092 | $ | 561,969 | $ | 453,699 |
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Cost of sales |
| 231,922 |
| 192,302 |
| 455,371 |
| 355,496 |
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Gross profit |
| 56,466 |
| 56,790 |
| 106,598 |
| 98,203 |
| ||||||||||||
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Selling, general and administrative expense |
| 27,188 |
| 29,719 |
| 56,424 |
| 53,318 |
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Income from operations |
| 29,278 |
| 27,071 |
| 50,174 |
| 44,885 |
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Other (income) expense: |
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Equity in partnerships' loss (income), and other income |
| 93 |
| (1,186) |
| (351) |
| (1,726) |
| ||||||||||||
Interest expense |
| 3,816 |
| 2,977 |
| 7,744 |
| 6,027 |
| ||||||||||||
Total other expense |
| 3,909 |
| 1,791 |
| 7,393 |
| 4,301 |
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Income before taxes |
| 25,369 |
| 25,280 |
| 42,781 |
| 40,584 |
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Provision for income taxes |
| 9,454 |
| 9,986 |
| 16,244 |
| 16,031 |
| ||||||||||||
Net income from continuing operations |
| 15,915 |
| 15,294 |
| 26,537 |
| 24,553 |
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Discontinued operations: |
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Net income | $ | 15,471 | $ | 15,444 | $ | 26,217 | $ | 24,789 |
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Net income per share - Basic: |
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Net income | $ | .53 | $ | .53 | $ | .89 | $ | .85 |
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Weighted average shares outstanding - Basic |
| 29,606 |
| 29,308 |
| 29,588 |
| 29,227 |
| ||||||||||||
Net income per share - Diluted: |
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Net income | $ | .52 | $ | .52 | $ | .88 | $ | .84 |
| ||||||||||||
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Weighted average shares outstanding - Diluted |
| 29,762 |
| 29,554 |
| 29,769 |
| 29,462 |
| ||||||||||||
See accompanying notes to condensed consolidated financial statements
GIBRALTAR STEEL CORPORATION | ||||
| ||||
Six Months Ended June 30 | ||||
|
| 2004 |
| 2003 |
|
| (unaudited) |
| (unaudited) |
|
|
|
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Cash flows from operating activities |
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|
|
|
Net income | $ | 24,789 | $ | 13,155 |
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
Depreciation and amortization |
| 12,001 |
| 10,957 |
Provision for deferred income taxes |
| 2,245 |
| 1,402 |
Equity in partnerships' income |
| (1,726) |
| (208) |
Distributions from partnerships |
| 846 |
| 411 |
Unearned compensation, net of restricted stock forfeitures |
| 69 |
| 194 |
Other noncash adjustments |
| 48 |
| 110 |
Increase (decrease) in cash resulting from changes |
|
|
|
|
in (net of acquisitions): |
|
|
|
|
Accounts receivable |
| (47,036) |
| (23,699) |
Inventories |
| (25,393) |
| (441) |
Other current assets |
| 619 |
| (2,392) |
Accounts payable and accrued expenses |
| 36,167 |
| 10,468 |
Other assets |
| (997) |
| (263) |
|
|
|
|
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Net cash provided by operating activities |
| 1,632 |
| 9,694 |
|
|
|
|
|
Cash flows from investing activities |
|
|
|
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Acquisitions, net of cash acquired |
| (48,600) |
| (83,580) |
Purchases of property, plant and equipment |
| (10,261) |
| (10,169) |
Net proceeds from sale of property and equipment |
| 316 |
| 265 |
|
|
|
|
|
Net cash used in investing activities |
| (58,545) |
| (93,484) |
|
|
|
|
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Cash flows from financing activities |
|
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Long-term debt reduction |
| (25,506) |
| (25,924) |
Proceeds from long-term debt |
| 57,680 |
| 115,464 |
Payment of dividends |
| (1,751) |
| (1,281) |
Net proceeds from issuance of common stock |
| 7,768 |
| 317 |
|
|
|
|
|
Net cash provided by financing activities |
| 38,191 |
| 88,576 |
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
| (18,722) |
| 4,786 |
|
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|
|
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Cash and cash equivalents at beginning of year |
| 29,019 |
| 3,662 |
|
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|
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Cash and cash equivalents at end of period | $ | 10,297 | $ | 8,448 |
See accompanying notes to condensed consolidated financial statements |
GIBRALTAR INDUSTRIES, INC. | ||||||||||||||
|
| Six Months Ended | ||||||||||||
|
|
|
| 2005 |
| 2004 | ||||||||
Cash flows from operating activities |
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| ||||||||
Net income |
|
| $ | 26,217 | $ | 24,789 | ||||||||
Net (loss) income from discontinued operations |
|
|
| (320) |
| 236 | ||||||||
Net income from continuing operations |
|
|
| 26,537 |
| 24,553 | ||||||||
Adjustments to reconcile net income to net cash provided by |
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
|
| 13,286 |
| 11,653 | ||||||||
Provision for deferred income taxes |
|
|
| (786) |
| 2,245 | ||||||||
Equity in partnerships' income |
|
|
| (294) |
| (1,726) | ||||||||
Distributions from partnerships |
|
|
| 748 |
| 846 | ||||||||
Unearned compensation, net of restricted stock forfeitures |
|
|
| 327 |
| 69 | ||||||||
Other noncash adjustments |
|
|
| 202 |
| 133 | ||||||||
Increase (decrease) in cash resulting from changes |
|
|
|
|
|
| ||||||||
in (net of acquisitions and dispositions): |
|
|
|
|
|
| ||||||||
Accounts receivable |
|
|
| (32,872) |
| (46,094) | ||||||||
Inventories |
|
|
| 1,862 |
| (24,929) | ||||||||
Other current assets |
|
|
| 1,858 |
| 561 | ||||||||
Accounts payable and accrued expenses |
|
|
| (3,918) |
| 37,235 | ||||||||
Other assets |
|
|
| (3,306) |
| (997) | ||||||||
|
|
|
|
|
|
| ||||||||
Net cash provided by continuing operations |
|
|
| 3,644 |
| 3,549 | ||||||||
Net cash used in discontinued operations |
|
|
| (486) |
| (1,832) | ||||||||
Net cash provided by operating activities |
|
|
| 3,158 |
| 1,717 | ||||||||
|
|
|
|
|
|
| ||||||||
Cash flows from investing activities |
|
|
|
|
|
| ||||||||
Acquisitions, net of cash acquired |
|
|
| - |
| (48,600) | ||||||||
Purchases of property, plant and equipment |
|
|
| (10,385) |
| (9,783) | ||||||||
Net proceeds from sale of property and equipment |
|
|
| 249 |
| 230 | ||||||||
Net proceeds from sale of business |
|
|
| 42,594 |
| - | ||||||||
|
|
|
|
|
|
| ||||||||
Net cash provided by (used in) investing activities for |
|
|
|
|
|
|
| |||||||
Net cash provided by (used in) investing activities for |
|
|
|
|
|
| ||||||||
Net cash provided by (used in) investing activities |
|
|
| 32,855 |
| (58,630) | ||||||||
|
|
|
|
|
|
| ||||||||
Cash flows from financing activities |
|
|
|
|
|
| ||||||||
Long-term debt reduction |
|
|
| (47,430) |
| (25,506) | ||||||||
Proceeds from long-term debt |
|
|
| 10,000 |
| 57,680 | ||||||||
Payment of dividends |
|
|
| (2,970) |
| (1,751) | ||||||||
Net proceeds from issuance of common stock |
|
|
| 520 |
| 7,768 | ||||||||
|
|
|
|
|
|
| ||||||||
Net cash (used in) provided by financing activities |
|
|
| (39,880) |
| 38,191 | ||||||||
|
|
|
|
|
|
| ||||||||
Net decrease in cash and cash equivalents |
|
|
| (3,867) |
| (18,722) | ||||||||
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at beginning of year |
|
|
| 10,892 |
| 29,019 | ||||||||
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at end of period |
|
| $ | 7,025 | $ | 10,297 | ||||||||
See accompanying notes to condensed consolidated financial statements | ||||||||||||||
GIBRALTAR STEEL CORPORATION
INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements as of June 30, 20042005 and 20032004 have been prepared by Gibraltar Steel CorporationIndustries, 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 June 30, 20042005 and 20032004 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, 2003,2004, as filed on Form 10-K.
Certain 20032004 amounts have been reclassified to conform with 2004 presentation.2005 presentation as discussed in Note 7.
The results of operations for the three and six month periodperiods ended June 30, 20042005 are not necessarily indicative of the results to be expected for the full year.
2. STOCK BASED COMPENSATION
2. INVENTORIES
Inventories consistOn May 19, 2005 the shareholders of the Company authorized the Gibraltar Industries, Inc. 2005 Equity Incentive Plan (the "Plan"). Under the terms of the Plan, the Board of Directors of the Company may grant incentive stock options, non-qualified stock options, restricted shares, restricted share units, performance shares, performance share units, or rights or combinations thereof to officers, directors and employees. The aggregate number of shares that may be distributed under the plan is limited to 2,250,000 shares of common stock. Of that number, no more than 1,350,000 shares can be awarded in form of restricted shares and restricted units, and no more than 900,000 shares can be awarded in the form of incentive stock options and rights. Option grants under the Plan must be made prior to February 19, 2015, and are exercisable at the discretion of the Board of Directors in no event more than 10 years from the date of grant.
Upon approval of the Plan, 283,036 restricted units, 20,000 restricted shares, and 2,016 non qualified options were issued to officers, directors and employees. At June 30, 2005, 1,944,928 shares were available to grant under the Plan. Of these shares, 1,046,964 shares were available to grant as restricted shares and restricted units and 900,000 shares were available to grant as incentive stock options and rights.
The Company accounts for the Plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25("APB No. 25"), "Accounting for Stock Issued to Employees", and related interpretations. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the common stock and the exercise price of the award. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation (in thousands)thousands, except per share data):
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
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|
|
|
|
|
|
Net income from continuing operations, as reported | $ | 15,915 | $ | 15,294 | $ | 26,537 | $ | 24,553 |
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|
|
|
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|
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|
|
Add: Compensation expense recognized in net income, net of related tax effects |
| 176 |
| 39 |
| 214 |
| 77 |
|
|
|
|
|
|
|
|
|
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
|
|
|
|
|
|
|
|
| (176) |
| (145) |
| (214) |
| (268) |
|
|
|
|
|
|
|
|
|
Pro forma net income | $ | 15,915 | $ | 15,188 | $ | 26,537 | $ | 24,363 |
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Net income from continuing operations per share: |
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|
|
|
Basic-pro forma | $ | .54 | $ | .52 | $ | .90 | $ | .83 |
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Diluted-as reported | $ | .53 | $ | .51 | $ | .89 | $ | .83 |
The fair value of option grants is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
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| ||
|
| June 30, |
| December 31, |
|
| 2004 |
| 2003 |
|
| (unaudited) |
| (audited)
|
Raw material | $ | 67,600 | $ | 53,737 |
Work-in process |
| 23,640 |
| 21,033 |
Finished goods |
| 49,993 |
| 32,761 |
|
|
|
|
|
Total inventories | $ | 141,233 | $ | 107,531 |
2005
Expected dividend yield 1.0%
Expected stock price volatility 42.05
Risk-free interest rate 3.84%
Expected life of option 5 years
3. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
The changes in shareholders' equity and comprehensive income consist of (in thousands):
|
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| ||||||||||||||||
|
| Comprehensive |
| Common Stock |
| Additional |
| Retained |
| Unearned |
| Accumulated |
| Treasury Stock |
| Total | |||||||||||||
|
| Income |
| Shares |
| Amount |
| Capital |
| Earnings |
| Compensation |
| Loss |
| Shares |
| Amount |
| Equity | |||||||||
|
|
|
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|
|
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|
|
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|
|
|
|
|
| |
Balance at December 31, 2003 |
|
|
|
| 19,255 |
| $ | 193 |
| $ | 199,206 |
| $ | 196,138 |
| $ | (818) |
|
| $ | (538) |
| 19 |
| $ | - |
| $ | 394,181 |
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|
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Comprehensive income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 24,789 |
| - |
|
| - |
|
| - |
|
| 24,789 |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 24,789 |
Other comprehensive income (loss): |
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|
|
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|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
Foreign currency translation adjustment, |
|
| (356) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| - |
Minimum pension liability adjustment |
|
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| - |
Unrealized gain on interest rate swaps, net |
|
| 764 |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| - |
Other comprehensive income |
|
| 408 |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| 408 |
| - |
|
| - |
|
| 408 |
Total comprehensive income |
| $ | 25,197 |
|
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Issuance of stock associated with public |
|
|
|
| 215 |
|
| 2 |
|
| 5,044 |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 5,046 |
Stock options exercised |
|
|
|
| 162 |
|
| 1 |
|
| 2,721 |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 2,722 |
Tax benefit from exercise of stock options |
|
|
|
| - |
|
| - |
|
| 268 |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 268 |
Cash dividends - $.095 per share |
|
|
|
| - |
|
| - |
|
| - |
|
| (1,864) |
|
| - |
|
|
| - |
| - |
|
| - |
|
| (1,864) |
Earned portion of restricted stock |
|
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 77 |
|
|
| - |
| - |
|
| - |
|
| 77 |
Forfeiture of restricted stock awards |
|
|
|
| (8) |
|
| - |
|
| (186) |
|
| - |
|
| 93 |
|
|
| - |
| 8 |
|
| - |
|
| (93) |
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Balance at June 30, 2004 |
|
|
|
| 19,624 |
| $ | 196 |
| $ | 207,053 |
| $ | 219,063 |
| $ | (648) |
|
| $ | (130) |
| 27 |
| $ | - |
| $ | 425,534 |
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| Accumulated |
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| |||||||||||||||||||||||||||||||||||||||||
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| Additional |
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| Other Comprehensive |
|
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| Total |
| |||||||||||||||||||||||||||||||||||||||||
|
| Income |
| Shares |
| Amount |
| Capital |
| Earnings |
| Compensation |
| Income |
| Shares |
| Amount |
| Equity |
| |||||||||||||||||||||||||||||||||||||
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Balance at January 1, 2005 |
|
|
|
| 29,625 |
| $ | 297 |
| $ | 209,765 |
| $ | 242,585 |
| $ | (572) |
|
| $ | 1,668 |
| 41 |
| $ | - |
| $ | 453,743 | |||||||||||||||||||||||||||||
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Comprehensive income: |
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| |||||||||||||||||||||||||||||
Net income |
| $ | 26,217 |
| - |
|
| - |
|
| - |
|
| 26,217 |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 26,217 | |||||||||||||||||||||||||||||
Other comprehensive income (loss): |
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|
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|
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Foreign currency translation adjustment, net of tax of $93 |
|
| (231) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| - | |||||||||||||||||||||||||||||
Unrealized gain on interest rate swaps, net of tax of $91 |
|
| 142 |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| - | |||||||||||||||||||||||||||||
Other comprehensive income |
|
| (89) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
|
| (89) |
| - |
|
| - |
|
| (89) | |||||||||||||||||||||||||||||
Total comprehensive income |
| $ | 26,128 |
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Issuance of restricted stock and restricted stock units |
|
|
|
| - |
|
| - |
|
| 6,044 |
|
| - |
|
| (6044) |
|
|
| - |
| - |
|
| - |
|
| - | |||||||||||||||||||||||||||||
Stock options exercised |
|
|
|
| 41 |
|
| - |
|
| 521 |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 521 | |||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
|
|
|
| - |
|
| - |
|
| 158 |
|
| - |
|
| - |
|
|
| - |
| - |
|
| - |
|
| 158 | |||||||||||||||||||||||||||||
Cash dividends - $.10 per share |
|
|
|
| - |
|
| - |
|
| - |
|
| (2,968) |
|
| - |
|
|
| - |
| - |
|
| - |
|
| (2,968) | |||||||||||||||||||||||||||||
Earned portion of restricted stock |
|
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 303 |
|
|
| - |
| - |
|
| - |
|
| 303 | |||||||||||||||||||||||||||||
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Balance at June 30, 2005 |
|
|
|
| 29,666 |
| $ | 297 |
| $ | 216,488 |
| $ | 265,834 |
| $ | (6,313) |
|
| $ | 1,579 |
| 41 |
| $ | - |
| $ | 477,885 | |||||||||||||||||||||||||||||
The cumulative balance of each component of accumulated other comprehensive loss, net of tax, is as follows (in thousands):
Foreign currency translation adjustment |
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Balance at December 31, 2003 | $ | 977 | $ | (58) | $ | (1,457) | $ | (538) |
Current period change |
| (356) |
| - |
| 764 |
| 408 |
Balance at June 30, 2004 | $ | 621 | $ | (58) | $ | (693) | $ | (130) |
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|
|
|
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|
Balance at January 1, 2005 | $ | 1,935 | $ | (125) | $ | (142) | $ | 1,668 |
Current period change |
| (231) |
| - |
| 142 |
| (89) |
Balance at June 30, 2005 | $ | 1,704 | $ | (125) | $ | - | $ | 1,579 |
Total comprehensive income for the three and six months ended June 30, 2004,2005, was $9,472,000$14,880,000 and $25,197,000,$26,128,000, respectively
and for the three and six months ended June 30, 2003,2004 was $5,769,000$15,725,000 and $14,558,000,$25,197,000, respectively.
4. INVENTORIES
Inventories consist of the following (in thousands):
|
| June 30, |
| December 31, |
|
| 2005 |
| 2004 |
|
|
|
|
|
Raw material | $ | 106,933 | $ | 121,614 |
Work-in process |
| 32,751 |
| 27,279 |
Finished goods |
| 59,377 |
| 58,322 |
|
|
|
|
|
Total inventories | $ | 199,061 | $ | 207,215 |
4.5. NET INCOME PER SHARE
Basic net income per share equals net income divided byis based on the weighted average number of common shares outstanding for the six months ended June 30, 2004 and 2003. The computation of diluted netoutstanding. Diluted income per share includes all dilutive common stock equivalents inis based on the weighted average number of common shares outstanding.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 assumed proceeds of common stock equivalents. Common stock equivalents relatingthe options assumed to stock optionsbe exercised.
The following table sets forth the computation of basic and restricted stock awards of 163,895 and 165,187 for the three months ended June 30, 2004 and 2003, respectively, and 156,485 and 160,656 for the six months ended June 30, 2004 and 2003, respectively, are included in diluted shares.earnings per share as of:
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| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||||||||||
Numerator: |
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Income available to common stockholders from continuing operations |
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Weighted average shares outstanding | 29,605,510 |
| 29,308,247 |
| 29,588,337 |
| 29,227,457 | |||||||||||||
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Denominator for diluted income per share: |
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Weighted average shares outstanding | 29,605,510 |
| 29,308,247 |
| 29,588,337 |
| 29,227,457 | |||||||||||||
Common stock options and restricted stock | 156,464 |
| 245,843 |
| 180,299 |
| 234,727 | |||||||||||||
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Weighted average shares and conversions | 29,761,974 |
| 29,554,090 |
| 29,768,636 |
| 29,462,184 | |||||||||||||
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|
At June 30, 2004,2005, options to purchase 343,256357,290 shares of the Company's common stock were outstanding and were exercisable at prices ranging from $10.00$7.33 to $21.75 per share. Of this total, 297,768 options were vested and exercisable. At June 30, 2004, all2005, 355,244 options were exercisable options hadat an exercise price below the $32.82$21.94 per share market price of the Company's common stock. At June 30, 2003, 762,9362004 options to purchase 514,884 shares of the Company's common stock were outstanding and exercisable at prices ranging from $6.67 to $14.50 per share. At June 30, 2004, 446,652 options were vested and were exercisable of which 561,761 hadat an exercise price below the $20.56$21.88 per share market price of the Company's common stock.
5.6. ACQUISITIONS
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 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.
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 are supported by an independent valuation. The identifiable intangible assets consisted of non-competition agreements with an aggregate fair market value of approximately $830,000. See Note 6 for further discussion. 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):
Working capital | $ | 3,485 |
Property, plant and equipment |
| 5,669 |
Intangible assets |
| 830 |
Goodwill |
| 19,546 |
| $ | 29,530 |
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 a paymentpayments of $1,332,000 and $345,000, wasrespectively, were made pursuant to the additional consideration.
On May 1, 2003, the Company acquired all of the outstanding stock of Air Vent Inc. (Air Vent). Air Vent is headquartered in Dallas, Texas and is primarily engaged in the manufacture and distribution of a complete line of ventilation products and accessories. The acquisition of Air Vent allowed the Company to strengthen its position in the building products market. The results of operations of Air Vent (included in the Company's Building Products segment) have been included in the Company's consolidated financial statements since the date of acquisition.
The aggregate purchase consideration for the acquisition of Air Vent was approximately $117,798,000, which was comprised of approximately $75,503,000 in cash, including direct acquisition costs, and $42,295,000 of unsecured subordinated debt, payable to the former owner of Air Vent. 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 are supported by an independent valuation. The identifiable intangible assets consisted of non-competition agreements with an aggregate fair market value of approximately $1,400,000. See Note 6 for further discussion. The excess consideration over such fair value was recorded as goodwill and aggregated approximately $103,104,000. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
Working capital | $ | 2,997 |
Property, plant and equipment |
| 10,297 |
Intangible assets |
| 1,400 |
Goodwill |
| 103,104 |
| $ | 117,798 |
The Company and the former owner of Air Vent have made a joint election under Internal Revenue Code (IRC) Section 338(h)(10) which allows the Company to treat the stock purchase as an asset purchase for tax purposes. As a result of the 338(h)(10) election, goodwill in the amount of $103,104,000 is fully deductible for tax purposes.
On January 1, 2004, the Company acquired all of the outstanding stock of Renown Specialties Company Ltd. (Renown). Renown is headquartered in Thornhill, Ontario and is a designer, manufacturer and distributor of construction hardware products in Canada. The acquisition of Renown served to broaden the Company's product lines and strengthen its existing position in the building products market. The results of operations of Renown (included in the Company's Building Products segment) have been included in the Company's consolidated financial statements since the date of acquisition.
The aggregate purchase consideration for the acquisition of Renown was approximately $5,870,000 which was comprised solely of cash, including direct 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 are supported by an independent valuation. The identifiable intangible assets consisted of non-competition agreements with an aggregate fair market value of $35,000, trademarks / trade names with an aggregate fair market value of $100,000, and customer relationships with an aggregate fair market value of $80,000. See Note 6 for further discussion.
The excess consideration over such fair value was recorded as goodwill and aggregated approximately $3,201,000, 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):
Working capital | $ | 1,504 |
Property, plant and equipment |
| 950 |
Intangible assets |
| 215 |
Goodwill |
| 3,201 |
| $ | 5,870 |
On June 1, 2004, the Company acquired the net assets of SCM Metal Products, Inc. (SCM). SCM is headquartered in Research Triangle Park, North Carolina and manufactures, markets and distributes non-ferrous metal powder products to customers in a number of different industries, including the automotive, aerospace, electronics and consumer products industries. The results of operations of SCM (included in the Company's Heat TreatingProcessed Metal Products segment) have been included in the Company's consolidated financial statements since the date of acquisition.
The aggregate purchase consideration for the acquisition of SCM was approximately $41,703,000$42,882,000 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. A final valuation is expected to be completed inThe fair market values of the third quarterproperly, plant, and equipment and identifiable intangible assets were determined with the assistance of 2004.an independent valuation. The identifiable intangible assets consisted of trademarks/trade names with an aggregate value of $440,000 (indeterminable useful life), unpatented technology with a value of $900,000 (10-year weighted average useful life) and customer relationships with a value of $5,560,000 (15-year weighted average useful life). The excess consideration over such fair value was recorded as goodwill and aggregated approximately $9,494,000,$4,238,000, which is fully deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
Working capital | $ | 15,368 |
Property, plant and equipment |
| 16,841 |
Intangible assets |
| - |
Goodwill |
| 9,494 |
| $ | 41,703 |
Working capital | $ | 15,863 |
Property, plant and equipment |
| 15,881 |
Intangible assets |
| 6,900 |
Goodwill |
| 4,238 |
| $ | 42,882 |
The following unaudited pro forma financial information (in thousands, except for per share data) presents the combined results of operations as if the acquisitionsSCM acquisition had occurred on January 1, 2003.2004. 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, 20032004 and are not necessarily indicative of future results of the combined companies:
|
| Three Months Ended Six Months Ended |
|
|
|
| June 30, 2004 |
| June 30, 2003 | ||||||||
|
|
|
|
|
|
|
| |||||||
Net sales |
|
| $ | 494,810 | $ | 418,628 |
|
| $ | 259,218 |
|
| $ | 479,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| $ | 26,485 | $ | 15,508 | ||||||||
Net income from continuing operation |
|
| $ | 15,933 |
|
| $ | 26,152 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - Basic |
|
| $ | 1.36 | $ | .97 |
|
| $ | .54 |
|
| $ | .89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - Diluted |
|
| $ | 1.35 | $ | .96 |
|
| $ | .54 |
|
| $ | .89 |
|
|
|
|
|
|
|
|
|
7. DISCONTINUED OPERATIONS
On February 16, 2004,
As part of its continuing evaluation of its business, the Company acquireddetermined 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 Covert Operations, Inc. (Covert),its Milcor subsidiary, which included
Portals Plus, for approximately $42,594,000. During the second quarter we reached an agreement with the purchaser regarding the final working capital adjustment, which resulted in a manufacturerloss of epoxies$728,000 on the sale. The carrying amounts of the assets and crack injection systemsliabilities sold were as follows (in thousands):
Current Assets | $ | 14,176 |
Property, Plant and Equipment |
| 11,861 |
Intangible Assets |
| 1,774 |
Goodwill |
| 17,303 |
Current Liabilities |
| (1,792) |
Net Assets | $ | 43,322 |
The results of operations for concreteMilcor for the current and masonry.prior period have been classified as discontinued operations in the condensed consolidated statements of income. Components of the net income from discontinued operations of Milcor are as follows:
| Three Months Ended |
| Six Months Ended June 30, | ||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 | |
|
|
|
|
|
|
|
|
| |
Net sales | $ | - | $ | 8,393 | $ | 3,452 | $ | 15,781 | |
Expenses |
| 728 |
| 8,145 |
| 3,976 |
| 15,391 | |
|
|
|
|
|
|
|
|
| |
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
We have identified a contingent liability with regards to Milcor that is currently not estimable. The aggregate purchase considerationcontingent liability relates to a potential payment to the Internal Revenue Service for a potential tax liability on the basis step-up of Covert was approximately $1,265,000, including direct acquisition costs. Thethe assets acquired with the acquisition of Covert resultedPortals Plus. We have engaged an independent valuation specialist to assist with its determination whether a step-up in approximately $569,000basis of these assets occurred, and if so, what the step-up in goodwill, which is fully deductible for tax purposes. The acquisition of Covert is not consideredbasis was, and expect this valuation to be materialcompleted during 2005, at which time, if required, the Company will recognize additional expense related to the Company's consolidated resultsdisposal of operations.these assets. We also 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 our withdrawal liability as of January 27, 2005, which could cause us to recognize additional expense. The plan's administrator expects to have the actuarial calculations completed during the next year.
6.
8. GOODWILL AND RELATED INTANGIBLE ASSETS
Goodwill
The changes in the approximate carrying amount of goodwill by reportable segment for the six months ended June 30, 20042005 is as follows (in thousands):
| Processed Steel |
| Building Products |
|
Heat Treating |
| Total |
|
|
|
|
|
|
|
|
B Balance as of December 31, 2003 | $ 19,347 |
| $ 201,706 |
| $ 46,104 |
| $ 267,157 |
Goodwill acquired | 32 |
| 4,170 |
| 9,494 |
| 13,696 |
Balance as of June 30, 2004 | $ 19,379 |
| $ 205,876 |
| $ 55,598 |
| $ 280,853 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
B Balance as of January 1, 2005 | $ 23,617 |
| 216,206 |
| $ 46,104 |
| $285,927 |
G Goodwill acquired | - |
| 1,332 |
| - |
| 1,332 |
G Goodwill disposed (Note 7) | - |
| (17,303) |
| - |
| (17,303) |
Foreign currency translation | - |
| (75) |
| - |
| (75) |
Balance as of June 30, 2005 | $ 23,617 |
| $ 200,160 |
| $ 46,104 |
| $ 269,881 |
Goodwill subject to the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS 142), has been tested for impairment (annual reassessment date as ofis October 31). TheThere are no indicators of impairment and the results of the latest annual reassessment determined that no goodwill impairments existed.
Intangible Assets
At June 30, 2004,2005, 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 and are included in the total assets of the Company's Building Products segment. Intangible assets at June 30, 20042005 are as follows (in thousands):
|
| Gross Carrying Amount |
| Accumulated Amortization |
| Estimated |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Estimated |
Trademark / Trade Name | $ | 120 | $ | 30 |
| 2 to 5 years | $ | 560 | $ | 77 |
| 2 to 5 years |
Unpatented Technology |
| 175 |
| 5 |
| 15 years |
| 1,075 |
| 114 |
| 15 years |
Customer Relationships |
| 80 |
| 11 |
| 5 years |
| 5,640 |
| 421 |
| 5 years |
Non-Competition Agreements |
| 2,365 |
| 384 |
| 5 to 10 years |
| 2,365 |
| 713 |
| 5 to 10 years |
Balance as of June 30, 2004 | $ | 2,740 | $ | 430 |
|
| ||||||
Balance as of June 30, 2005 | $ | 9,640 | $ | 1,325 |
|
|
Intangible asset amortization expense for the three and six month periods ended June 30, 20042005 and 20032004 aggregated approximately $212,000$218,000 and $65,000,$438,000, and $101,000 and $212,000, respectively.
Amortization expense related to intangible assets for the remainder of fiscal 20042005 and the next five years thereafter is as follows:follows (in thousands)
Year Ended December 31, |
|
|
|
|
2004 | $ | 207,000 | ||
2005 | $ | 415,000 | $ | 438 |
2006 | $ | 365,000 | $ | 825 |
2007 | $ | 365,000 | $ | 825 |
2008 | $ | 240,000 | $ | 701 |
2009 | $ | 154,000 | $ | 621 |
2010 | $ | 612 |
7.9. SEGMENT INFORMATION
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:
(i) Processed steel products,Metal Products, which primarily includes the intermediate processing of wide, open tolerance flat-rolled sheet steel and other metals through the application of several different processes to produce high-quality, value-added coiled steel and other metal products to be further processed by customers.
(ii) Building products,Products, which primarily includes the processing of sheet steel, aluminum and other materials to produce a wide variety of building and construction products.
(iii) Heat treating,Thermal Processing, which includes a wide range of metallurgical heat treating processing processes in which customer-owned metal parts are exposed to precise temperatures, atmospheres and quenchants to improve their mechanical properties, durability and wear resistance and the manufacture of non-ferrous metal powder products, some of which are used by other operations of the Company.resistance.
The following table illustrates certain measurements used by management to assess the performance of the segments described above (in thousands):
Three Months Ended | Six Months Ended | |||||||
| 2004 |
| 2003 | 2004 |
| 2003 | ||
|
| (unaudited) |
| (unaudited) |
| (unaudited) | (unaudited) | |
Net sales |
|
|
|
|
|
|
|
|
Processed steel products | $ | 89,280 | $ | 69,510 | $ | 166,446 | $ | 140,713 |
Building products |
| 136,734 |
| 111,984 |
| 246,057 |
| 180,279 |
Heat treating |
| 31,471 |
| 21,912 |
| 56,977 |
| 43,946 |
| $ | 257,485 | $ | 203,406 | $ | 469,480 | $ | 364,938 |
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
Processed steel products | $ | 10,449 | $ | 6,304 | $ | 18,476 | $ | 14,586 |
Building products |
| 20,243 |
| 13,460 |
| 31,034 |
| 15,990 |
Heat treating |
| 4,829 |
| 2,320 |
| 8,777 |
| 5,283 |
Corporate |
| (7,940) |
| (4,765) |
| (12,497) |
| (7,898) |
| $ | 27,581 | $ | 17,319 | $ | 45,790 | $ | 27,961 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Processed steel products | $ | 1,377 | $ | 1,410 | $ | 2,817 | $ | 2,874 |
Building products |
| 2,497 |
| 2,266 |
| 4,944 |
| 4,202 |
Heat treating |
| 1,839 |
| 1,621 |
| 3,565 |
| 3,213 |
Corporate |
| 329 |
| 365 |
| 675 |
| 668 |
| $ | 6,042 | $ | 5,662 | $ | 12,001 | $ | 10,957 |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
Processed steel products | $ | 1,176 | $ | 1,231 | $ | 2,375 | $ | 2,338 |
Building products |
| 2,706 |
| 1,808 |
| 5,154 |
| 3,454 |
Heat treating |
| 643 |
| 2,186 |
| 2,002 |
| 4,041 |
Corporate |
| 280 |
| 101 |
| 730 |
| 336 |
| $ | 4,805 | $ | 5,326 | $ | 10,261 | $ | 10,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2004 |
| December 31, 2003 |
Total identifiable assets |
|
|
|
|
| (unaudited) |
| (audited) |
Processed steel products |
|
|
|
| $ | 181,804 | $ | 161,334 |
Building products |
|
|
|
|
| 458,536 |
| 406,792 |
Heat treating |
|
|
|
|
| 192,245 |
| 142,575 |
Sub-total |
|
|
|
|
| 832,585 |
| 710,701 |
Corporate |
|
|
|
|
| 52,410 |
| 67,042 |
|
|
|
|
| $ | 884,995 | $ | 777,743 |
Three Months Ended | Six Months Ended |
|
| 2005 |
| 2004 |
| 2005 |
| 2004 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Net sales |
|
|
|
|
|
|
|
| |||||||||
Processed metal products | $ | 118,188 | $ | 94,320 | $ | 245,800 | $ | 171,486 | |||||||||
Building products |
| 142,654 |
| 128,341 |
| 261,826 |
| 230,276 | |||||||||
Thermal processing |
| 27,546 |
| 26,431 |
| 54,343 |
| 51,937 | |||||||||
| $ | 288,388 | $ | 249,092 | $ | 561,969 | $ | 453,699 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Income (loss) from operations |
|
|
|
|
|
|
|
| |||||||||
Processed metal products | $ | 8,444 | $ | 11,004 | $ | 22,467 | $ | 19,031 | |||||||||
Building products |
| 22,197 |
| 19,734 |
| 32,701 |
| 30,129 | |||||||||
Thermal processing |
| 4,200 |
| 4,274 |
| 7,605 |
| 8,222 | |||||||||
Corporate |
| (5,563) |
| (7,941) |
| (12,599) |
| (12,497) | |||||||||
| $ | 29,278 | $ | 27,071 | $ | 50,174 | $ | 44,885 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Depreciation and amortization |
|
|
|
|
|
|
|
| |||||||||
Processed metal products | $ | 1,763 | $ | 1,472 | $ | 3,525 | $ | 2,912 | |||||||||
Building products |
| 2,577 |
| 2,319 |
| 5,002 |
| 4,596 | |||||||||
Thermal processing |
| 1,983 |
| 1,744 |
| 3,937 |
| 3,470 | |||||||||
Corporate |
| 490 |
| 329 |
| 822 |
| 675 | |||||||||
| $ | 6,813 | $ | 5,864 | $ | 13,286 | $ | 11,653 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Capital expenditures (excluding acquisitions) |
|
|
|
|
|
|
|
| |||||||||
Processed metal products | $ | 1,066 | $ | 1,201 | $ | 2,548 | $ | 2,400 | |||||||||
Building products |
| 1,983 |
| 2,484 |
| 4,496 |
| 4,676 | |||||||||
Thermal processing |
| 790 |
| 618 |
| 2,283 |
| 1,977 | |||||||||
Corporate |
| 472 |
| 279 |
| 1,058 |
| 730 | |||||||||
| $ | 4,311 | $ | 4,582 | $ | 10,385 | $ | 9,783 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
| June 30, 2005 |
| December 31, 2004 | |||||||||
|
|
|
|
|
| (unaudited) |
|
| |||||||||
Total identifiable assets |
|
|
|
|
|
|
|
| |||||||||
Processed metal products |
|
|
|
| $ | 255,000 | $ | 267,297 | |||||||||
Building products |
|
|
|
|
| 470,796 |
| 444,677 | |||||||||
Thermal processing |
|
|
|
|
| 148,976 |
| 149,454 | |||||||||
Sub-total |
|
|
|
|
| 874,772 |
| 861,428 | |||||||||
Corporate * |
|
|
|
|
| 61,504 |
| 96,273 | |||||||||
|
|
|
|
| $ | 936,276 | $ | 957,701 | |||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
8. BORROWINGS UNDER10. NEW REVOLVING CREDIT FACILITY
The
On April 1, 2005, the Company entered into a Credit Agreement with a consortium of banks that established a revolving line of credit, and provides for the issuance of letters of credit and swing line loans through April 2010. There is an aggregate borrowing limitof $250,000,000 available under the new Credit Agreement, with a $50,000,000 expansion feature at the Company's revolvingoption, subject to approval by the participating financial institutions. The credit facility is $290,000,000.secured by substantially all of the Company's accounts receivable, inventory, equipment and fixtures and other personal property. In conjunction with the new Credit Agreement, the Company terminated its existing credit facility. At June 30, 2004,2005, the Company had $140,000,000$125,500,000 in availability under the revolving credit facility. Borrowings under this credit agreement carry interest at LIBOR plus a fixed rate of between 57.5 basis points and 137.5 basis points, based on a long-term liquidity ratio. At June 30, 2005 the weighted average interest rate was 4.01%.
9. NEW DEBT
In June 2004, the Company entered into a $75.0 million private placement of debt with The Prudential Insurance Company of America. This senior secured note bears interest at 5.75% annually and has a seven year term. The Company drew down $25.0 million at the inception of the note which was outstanding at June 30, 2004, and will draw down the remaining $50.0 million at specified dates and amounts which coincide with the expiration of the interest rate swap agreements currently outstanding under the Company's existing revolving credit facility. The initial $25.0 million borrowing under this note was used to pay down a portion of the existing revolving credit facility.
10.11. RELATED PARTY TRANSACTIONS
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 three equal annual principal installments of $2,917,000 per note, beginning on April 1, 2004, 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 June 30, 2005 and 2004, the current portion of these notes aggregated approximately $5,834,000.
$5,833,000. Accrued interest and interest expense related to these notes payable was approximately $73,000 and $145,000 as of June 30, 2005 and 2004 and $217,000 and $359,000 for the six months ended June 30, 2004.2005 and 2004, 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 $741,000 and $552,000 for the six months ended June 30, 2004.
11. STOCK OPTIONS
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS 148, Accounting for Stock-Based Compensation-Transition2005 and Disclosure which amends SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As allowed by SFAS 123, the Company follows the disclosure requirements of SFAS 123 and SFAS 148, but continues to account for its stock options using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25). Accordingly, no compensation cost has been recognized for the stock option plans, as stock options granted under these plans have an exercise price equal to 100% of the underlying stock price on the date of grant.
The following table illustrates the pro forma effect on net income and net income per share, had the Company used the Black-Scholes option pricing model to calculate the fair value of stock based employee compensation pursuant to the provisions of SFAS 123 and SFAS 148 (in thousands, except per share data):
Three Months Ended | Six Months Ended | |||||||
|
| 2004 | 2003 | 2004 |
| 2003 | ||
|
| (unaudited) |
| (unaudited) |
| (unaudited) | (unaudited) | |
|
|
|
|
|
|
|
|
|
Net income as reported | $ | 15,444 | $ | 8,251 | $ | 24,789 | $ | 13,155 |
Add: Compensation expense |
| 39 |
| 78 |
| 77 |
| 156 |
|
|
|
|
|
|
|
|
|
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| (145) |
| (181) |
| (268) |
| (344) |
|
|
|
|
|
|
|
|
|
Pro forma net income | $ | 15,338 | $ | 8,148 | $ | 24,598 | $ | 12,967 |
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic - as reported | $ | .79 | $ | .52 | $ | 1.27 | $ | .83 |
Basic - pro forma | $ | .78 | $ | .51 | $ | 1.26 | $ | .81 |
|
|
|
|
|
|
|
|
|
Diluted - as reported | $ | .78 | $ | .51 | $ | 1.26 | $ | .82 |
Diluted - pro forma | $ | .78 | $ | .51 | $ | 1.25 | $ | .81 |
2004, respectively.
12. NET PERIODIC BENEFIT COSTSCOST
The following table presentstables present the components of net periodic pension and other postretirement benefit costs charged to expense for the six months ended June 30 (in thousands):
Pension Benefit
Pension Benefit | Other Post | |||||||
| 2004 |
| 2003 | 2004 | 2003 | |||
|
|
|
|
|
|
|
|
|
Service cost | $ | 86 | $ | 78 | $ | 57 | $ | 50 |
Interest cost |
| 53 |
| 54 |
| 101 |
| 95 |
Amortization of unrecognized prior service cost |
| - |
| - |
| (7) |
| (7) |
Loss amortization |
| - |
| 2 |
| 49 |
| 45 |
Net periodic benefit costs | $ | 139 | $ | 134 | $ | 200 | $ | 183 |
|
|
|
|
|
|
|
|
|
Three Months Ended | Six Months Ended |
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
|
|
|
|
|
|
|
Service cost | $ | 44 | $ | 43 | $ | 88 | $ | 86 |
Interest cost |
| 31 |
| 26 |
| 62 |
| 53 |
Net periodic benefit costs | $ | 75 | $ | 69 | $ | 150 | $ | 139 |
|
|
|
|
|
|
|
|
|
Other Post Retirement Benefits
13. COMMON STOCK OFFERING OVER-ALLOTMENT
In connection with the Company's December 2003 common stock offering, the Company granted the underwriters an option to purchase additional shares of common stock to cover over-allotments. In January 2004, the underwriters exercised this option and purchased an additional 214,625 shares of the Company's common stock at a price of $24.75 per share. Net proceeds to the Company associated with the purchase of these additional shares aggregated approximately $5,000,000, and was used to reduce outstanding debt.
Three Months Ended | Six Months Ended |
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
|
|
|
|
|
|
|
Service cost | $ | 23 | $ | 28 | $ | 46 | $ | 57 |
Interest cost |
| 53 |
| 50 |
| 106 |
| 101 |
Amortization of unrecognized prior service cost |
| (5) |
| (3) |
| (10) |
| (7) |
Loss amortization |
| 27 |
| 24 |
| 54 |
| 49 |
Net periodic benefit costs | $ | 98 | $ | 99 | $ | 196 | $ | 200 |
�� |
|
|
|
|
|
|
|
|
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 June 30, 20042005 and December 31, 2003,2005, and the condensed consolidated results of operations for the three and six months ended June 30, 20042005 and 20032004 and cash flows of the Company for six months ended June 30, 20042005 and 2003.2004.
The Company is organized into three reportable segments - Processed SteelMetal Products, Building Products and Heat Treating.Thermal Processing. The Company also held equity positions in two joint ventures as of June 30, 2004.2005.
The Processed SteelMetal 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, Chrysler 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 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. In January 2004, the Company acquired Renown Specialties Company Ltd. (Renown), a manufacturer and distributor of construction hardware products in Canada. The acquisition of Renown served to broaden the Company's product lines and strengthen its existing position in the building products market.
The Heat TreatingThermal Processing segment primarily 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. Additionally, with the June 1, 2004 acquisition of SCM Metal Products, Inc. (SCM), this segment now manufactures non-ferrous metal powder products, including brazing paste, roofing shingles, oil-less bearings and friction products, to the automotive, aerospace, electronics and consumer products industries. Some of these products are used by other operations of the Company. This segment services such customers as General Motors, Ford, Eaton Corporation, Dana Corporation and International Truck.
The following table sets forth the Company's net sales by reportable segment for the three and six months ending June 30, (in thousands):
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| Three Months Ended | Six Months Ended |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
Net sales |
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|
|
|
|
|
|
|
Processed steel products | $ | 89,280 | $ | 69,510 | $ | 166,446 | $ | 140,713 |
Building products |
| 136,734 |
| 111,984 |
| 246,057 |
| 180,279 |
Heat treating |
| 31,471 |
| 21,912 |
| 56,977 |
| 43,946 |
Total consolidated net sales | $ | 257,485 | $ | 203,406 | $ | 469,480 | $ | 364,938 |
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|
|
|
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
Net sales |
|
|
|
|
|
|
|
|
Processed metal products | $ | 118,188 | $ | 94,320 | $ | 245,800 | $ | 171,486 |
Building products |
| 142,654 |
| 128,341 |
| 261,826 |
| 230,276 |
Thermal Processing |
| 27,546 |
| 26,431 |
| 54,343 |
| 51,937 |
Total consolidated net sales | $ | 288,388 | $ | 249,092 | $ | 561,969 | $ | 453,699 |
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Results of Operations
Consolidated
Net sales increased by approximately $54.1$39.3 million, or 26.6%15.8% to $257.5$288.4 million for the quarter ended June 30, 2004,2005, from net sales of $203.4$249.1 million for the quarter ended June 30, 2003.2004. Net sales increased by approximately $104.6$108.3 million, or 28.6%23.9% to $469.5$562.0 million for the six months ended June 30, 2004,2005, from net sales of $364.9$453.7 million for the six months ended June 30, 2003.2004. The increase in net sales for the quarter was partly due to the addition of net sales of Air Vent (acquired May 1, 2003), Renown (acquired January 1, 2004), and SCM (acquired June 1, 2004) which contributed approximately $37.7$11.3 million in additional net sales.The remaining increase results primarily from increased product shipping volumes combined with higher selling prices. The increase in the net sales for the six months ended June 30, 2004 was due primarily to the addition of net sales of Construction Metals (acquired April 1, 2003), Air Vent, Renownboth volume and SCM which contributed $84.1 million in additional net sales.selling price increases. The remaining increase in net sales for the six months ended June 30, 2004 was the result of both volume and selling price increases. Inthe addition of net sales of SCM which contributed $28.8 million in additional net sales. Due to the effects of availability and pricingincrease in demand for steel one ofduring the major raw materials used in the Company's manufacturing operations, had a major impact on reported sales. Sales, particularly in the Building Product segment, were favorably impacted by increased demand for the Company's products. Due to an increase in global demand for steel,during 2004, especially in China, steel producers are experiencingexperienced a shortage of steel scrap and coke, two key materials used in the manufacture of steel. The shortage of these raw materials has resulted in significant increases in both steel demand and steel pricing.pricing throughout 2004. The increase in steel demandpricing, which has been partially passed on to our customers in the form of higher selling prices, along with an increase in the Company's sales and market penetration, which was the result of new and innovative product offerings, as well as enhancements in supply solutions for the Company's customers, had a significant impact on increased sales volumes on both the three and six month periods. In addition to volume increases, net sales dollars during the periods were also favorably impacted by the Company's ability to pass on a portion of the recent raw material cost increases and steel surcharges to its customers in the form of higher selling prices.
Gross profit as a percentage of net sales increaseddecreased to 22.6%19.6% for the quarter ended June 30, 2004,2005, from 19.9%22.8% for the quarter ended June 30, 2003.2004. Gross profit margins increaseddecreased to 21.5%19.0% for the six months ended June 30, 2004,2005, from 19.1%21.6% for the same period in 2003.2004. These improvementsdeclines were primarily due to higher salesthe result of material and production volumes combined withenergy cost increases that have not been fully recovered in increased selling pricesprices. The decline in gross margins for both the three and six month periods ended June 30, 2005 were partially offset by reductions in labor cost and transportation expenses as a percentage of net sales, as compared to the increased cost of raw materials, primarily steel.same periods in the prior year.
Selling, general and administrative expenses increaseddecreased to $30.7$27.2 million during the second quarter of 20042005 from $23.2$29.7 million in the same quarter of 2003, an increase2004, a decrease of approximately $7.5$2.5 million, or 32.5%8.4%. Selling, general and administrative expenses for the six months ended June 30, 20042005 increased to $55.3$56.4 million from $41.6$53.3 million for the same period in 2003,2004, an increase of $13.7$3.1 million or approximately 32.8%5.8%. The primary reasons for the increasedecrease in both the three and six month periodsperiod is the inclusion of a full quarter of expenses for Air Vent (acquired May 1, 2003), increaseddecreased expenses related to incentive based compensation of approximately $1.9 million and a significant increasesdecline in costs to comply with the requirements of the Sarbanes-Oxley Act. Act of approximately $1.2 million as the project consumed significant external resources during the second quarter of 2004. The increase for the six month period is the result of increased salaries, increased professional services expense experienced in the first quarter of 2005, and the addition of $1.8 million of costs from SCM (acquired June 2004).As a result, selling, general and administrative expenses increasedas a percentage of net sales decreased to 11.9%9.4% from 11.4%11.9% and to 11.8%10.0% from 11.4%11.8% for the three and six month periods, respectively.
IncomeAs a result of the above, income from continuing operations as a percentage of net sales for the quarter ended June 30, 2004 increased2005 decreased to 10.7%10.2% from 8.5%10.9% for the same period in 2003.2004. Income from continuing operations for the six months ended June 30, 2004 increased2005 decreased to 9.8%8.9% from 7.7%9.9% for the comparable period last year.
Equity in partnerships' income increaseddecreased by approximately $1.0$1.3 million and $1.5$1.4 million for the quarter ended and six months ended June 30, 2004,2005, respectively, from the comparable prior periods. These increasesdecreases are primarily due to the inclusionCompany's share of the losses incurred during the second quarter from the Company's equity interest in Gibraltar DFC, a joint venture. The losses were incurred as the joint venture entered into in December 2003.lost significant volume to a competitor that has cut selling prices below market levels.
Interest expense decreasedincreased by approximately $500,000$800,000 for the quarter ended June 30, 20042005 to $3.2$3.8 million from $3.7$3.0 million for the quarter ended June 30, 2003. This decrease was due to the reduced debt levels in 2004 caused by the use of the proceeds from the Company's stock offering in December 2003 to pay down debt and the higher average borrowings in the 2003 quarter due to borrowings related to the acquisition of Construction Metals and Air Vent.2004. Interest expense for the six months ended June 30, 2004 was comparable to the interest expense for the same period in 2003.
Income before taxes increased by $11.8 million to $25.5 million for the quarter ended June 30, 2004 and $19.0 million to $41.0approximately $1.7 million for the six months ended June 30, 2003,2005 to $7.7 million from $6.0 million for the six months ended June 30, 2004.This increase was due to the higher average borrowings in 2005 caused by the acquisition of SCM in June 2004 and increased working capital requirements as commodity cost increases drove higher levels of inventory and higher sales increased accounts receivable.
As a result of the above, income from continuing operations before taxes increased by $0.1 million to $25.4 million for the quarter ended June 30, 2005 and $2.2 million to $42.8 million for the six months ended June 30, 2005, compared to the same periods in 2003.2004.
Income taxes for the quarter and six months ended June 30, 20042005 approximated $10.0$9.9 million and $16.2$16.7 million, respectively and were based on a 39.5%39.0% effective tax rate compared to 40%39.5% in 2003.2004. The Company is continuing to evaluate the impact of the qualified production activities deduction under the American Jobs Creation Act of 2004. When fully phased in, a deduction of 9% of the lesser of qualified production activities income or taxable income after net operating loss deductions will be allowed. The deduction is also limited to 50% of Form W-2 wages. Based upon preliminary analyses completed by the Company, the impact for 2005 is not expected to be significant.
The following provides further information by segment:
Processed Steel Products
Net sales increased by approximately $19.8$23.9 million, or 28.4%25.3%, to $89.3$118.2 million for the quarter ended June 30, 2004,2005, from net sales of $69.5$94.3 million for the quarter ended June 30, 2003.2004. Net sales increased by approximately $25.7$74.3 million, or 18.3%43.3%, to $166.4$245.8 million for the six months ended June 30, 20042005 from net sales of $140.7$171.5 million for the same period in 2003.2004. These increases in net sales were primarily a function of both higher sales volumes, especially in the Company's coated steel and painted products, as well as increases in selling price due to the recent rise in overall steel prices.prices that occurred throughout 2004, as well the acquisition of SCM in June 2004.
Income from operations as a percentage of net sales increaseddecreased to 11.7%7.1% of net sales for the quarter ended June 30, 20042005 from 9.1%11.7% in the second quarter a year ago. For the six months ended June 30, 2004,2005, income from operations as a percentage of net sales increaseddecreased to 11.1%9.1% from 10.4%11.1% for the comparable 20032004 period. These increasesdecreases in operating margin were due primarily to higher volumes andincreased material costs that have not been fully recovered in increased selling prices combined with successful cost control measures. The increases in operating margins were partially offset by increased raw material costs.
improved labor utilization, and the acquisition of SCM, which has slightly higher margins.
Building Products
Net sales in the quarter ended June 30, 20042005 increased to $136.7$142.7 million, or 22.1%11.2%, from net sales of $112.0$128.3 million in the second quarter of 2003.2004. Net sales increased to $246.1$261.8 million for the six months ended June 30, 20042005 from net sales of $180.3$230.3 million for the same period in 2003,2004, an increase of $65.8$31.6 million or 36.5%13.7%. The increase in net sales during the quarterboth periods was due primarily to increased volumes and selling prices together with the addition of net sales of Air Vent (acquired May 1, 2003), and Renown (acquired January 1, 2004). The increase in the net sales for the six months ended June 30, 2004 were also favorably impacted by increased volumes and pricing plus the addition of net sales for Air Vent and Renown as well as Construction Metals (acquired April 1, 2003).prices. The increase in sales volume was due primarily to improved market and sales penetration, which resulted from new and innovative product offerings, as well as improved supply solutions for customers. The increase in selling prices for the current quarter and six months were the result of the Company's ability to pass on a portion of raw material cost increases to their customers.customers over the past twelve months.
Income from operations as a percentage of net sales increased to 14.8%15.6% for the quarter ended June 30, 20042005 from 12.0%15.4% a year ago. For the six months ended June 30, 2004,2005, income from operations as a percentage of net sales increaseddecreased to 12.6%12.5% from 8.9%13.1% for the same period in 2003.2004. The increase in operating margins in the quarter were due to volume and selling price increases and decreased incentive compensation and transportation costs, partially offset by increased raw material costs, combined with the impact of a full quarter of operating income from the Air Vent operations.costs. The increase in operating margin percentage was partially offset by increased incentive based compensation costs together with higher advertising and promotional expenses. The increasedecrease in operating margin for the six months was due primarily to volume and selling price increases combined withthe result of higher margins from the Construction Metals and Air Vent acquisitions,material costs which were partially offset by increased raw materialreduced labor costs and increased incentive-based compensation costs.transportation expenses
Heat TreatingThermal Processing
In the second quarter of 2004,2005, net sales increased by approximately $9.6$1.1 million to $31.5$27.5 million from net sales of $21.9$26.4 million for the quarter ended June 30, 2003,2004, an increase of 43.6%4.2%. Net sales in the six months ended June 30, 20042005 increased by approximately $13.1$2.4 million, or 29.7%4.6%, to $57.0$54.3 million from net sales of $43.9$51.9 million in the same period in 2003.2004. The increase in net sales for the quarterly and six month periods ended June 30, 20042005 were due primarily to the improvements in the overall general economy, as well as increased volume at the Company's brazing operation, combined with the addition of the net sales from the SCM acquisition, which approximated $5.2 million.economy.
Income from operations as a percentage of net sales increaseddecreased to 15.3%15.2% for the quarter ended June 30, 20042005 from 10.6%16.2% in the second quarter of 2003.2004. For the six months ended June 30, 2004,2005, income from operations as a percentage of net sales increaseddecreased to 15.4%14.0% compared to 12.0%15.8% for the same period in 2003.2004. These increasesdecreases in operating margin percentage were due primarily to increased operating levels and production volumes combined with improved fixed cost absorption levels.energy expenses, partially offset by a slight reduction in labor costs.
Outlook
The outlook for the quarter ended September 30, 2004 is favorable inIn comparison to the quarter ended September 30, 2003. The2004, we expect a challenging third quarter in 2005. While the Company believes it is positioned to benefit from many of its internal growth initiatives and cost reduction programs, as well as the many operational improvements recently put in place. In addition,place, the decline in the market pricing for steel, and the related demand for lower selling prices from our customers, particularly in our Processed Metals segment, is expected to cause a further reduction in gross margins, particularly in our Processed Metals segment, during the third quarter as we work through higher priced on hand inventories. Demand for the Company's products remains strong in light of the general overall economic trends and the relatively strong outlook in the housing and automotive markets.
To date, the Company has been successful in managing material cost increases through increases in selling prices. However, the Company cannot assure that if material costs and related cost pressures continue, it will be able to pass these increases along to its customers.
In 2004,2005, the Company will realize a full yearsyear's worth of sales and earnings from the 2003 acquisitions2004 acquisition of Construction Metals and Air Vent. Also, the results of the SCM acquisition will be included in the Company's sales and earnings for the remaining six months of 2004. In addition, the Company is continuously evaluating numerous acquisition opportunities, and the Company's recent stock offering provides it with the increased resources and financial flexibility to capitalize on such 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.
The Company's shareholders' equity increased by approximately $31.3$24.1 million or 8.0%5.3%, to $425.5$477.9 million, at June 30, 2004.2005. This increase in shareholder's equity was primarily due to net income of $24.8$26.2 million, the receipt of $5.0 million in net proceeds from the issuance of common stock, as well as proceeds of $2.7 million$500,000 from the exercise of stock options, partially offset by the declaration of approximately $1.8$3.0 million in shareholder dividends.
During the first six months of 2004,2005, the Company's working capital (inclusive of the impact of working capital acquired from the 2004 acquisitions), increased by approximately $36.7$18.8 million, or 24.4%7.8%, to approximately $187.4$261.1 million. This increase in working capital was primarily the result of increasesan increase in accounts receivable and inventory levels of $60.3$25.9 million and $33.7 million, respectively. These increases in working capital were offset by increases in accounts payable and accrued expenses which aggregated $40.1 million and$6.4 million. These increases in working capital were offset by reductions in inventory levels, cash and cash equivalents, of approximately $18.7 million.
On June 1, 2004, the Company purchased theand other current assets of the Copper Powder Division of SCM Metals Products, Inc. The Company paid approximately $41.7$8.2 million, in cash for the acquisition, which included direct acquisition costs.$3.9 million, and $1.4 million, respectively.
Net cash provided by continuing operating activities for the six months ended June 30, 20042005 was approximately $1.6$3.2 million and was primarily the result of net income from continuing operations of $24.8$26.5 million combined with depreciation and amortization of $12.0$13.3 million, the provision for deferred income taxesincreases in accounts receivable of $2.2$32.9 million increasesand decreases in accounts payable and accrued expenses of $36.2$3.9 million, offset by an increasedecrease in accounts receivable and inventories of $47.0 million and $25.4 million, respectively.$1.9 million.
In addition to the net cash provided by operating activities, the Company realized net proceeds of $5.0 million from the issuance of common stock and cash generated from the proceeds of long-term debt of $57.7 million, which included $25.0 million in new term debt and $2.7 million generated by the exercise of stock options. These resources together with theThe cash on hand at the beginning of the year wereperiod, along with the cash generated from operations and the cash from the disposition of Milcor of $42.6 million, was used to pay down $25.5 million of the Company's revolving credit debt, to fund current operations, acquisitions of $48.6 million (net of cash acquired), capital expenditures of $10.3$10.4 million and pay cash dividendsdividend payments of $1.8 million. Capital spending$3.0 million, along with the repayment of $37.4 million of debt.
On April 1, 2005, the Company entered into a Credit Agreement with a consortium of banks that established a revolving line of credit, and provides for the balanceissuance of the yearletters of credit and swing line loans through April 2010. There is expected to be in a range of $7.0 to $8.0 million.
The Company's revolving credit facility, which expires in June 2007, provides for an aggregate borrowing limit of up to $290.0 million. Additionally,$250,000,000 available under the revolving credit facility containsnew Credit Agreement, with a $10.0 million$50,000,000 expansion feature at the Company's option, subject to approval by the participating financial institutions. Borrowings thereunder areThe credit facility is secured withby substantially all of the Company's accounts receivable, inventoriesinventory, equipment and fixtures and other personal property and equipment.property. In conjunction with the new Credit Agreement, the Company terminated its existing credit facility. At June 30, 2004,2005, the Company had used approximately $150.0 million of the revolving credit facility, resulting$125,500,000 in $140.0 million in availability. At June 30, 2004, the Company had interest rate swap agreements outstanding which effectively converted $50.0 million of borrowings under its revolving credit agreement to fixed interest rates ranging from 7.22% to 7.93%. Additional borrowingsavailability under the revolving credit facilityfacility. Borrowings under this credit agreement carry interest at LIBOR plus a fixed rate. At June 30, 2004, additional borrowings under2005 the revolving credit facility aggregated approximately $100.0 million. The weighted average interest rate of these additional borrowings was 2.92% at June 30, 2004.4.01%.
The Company's revolving credit facility contains various debt covenants. At June 30, 20042005 the Company was in full compliance with all covenants.
In 2002, the Company entered into a $50.0 million private placement of debt with The Prudential Insurance Company of America, which consists of a $25.0 million senior secured note bearing interest at 7.35% annually, due on July 3, 2007 and a $25.0 million senior subordinated note, bearing interest at 8.98% annually, due on January 3, 2008. At June 30, 2004,2005, the total principal balance of the private placement debt aggregated $50.0 million, none of which is due within the current fiscal year.
In June 2004, the Company entered into a $75.0 million private placement of debt with The Prudential Insurance Company of America. This senior secured note bears interest at 5.75% annually and has a seven year term. The Company had $55.0 million outstanding at December 31, 2004, drew down $25.0 million at the inception of the note and will draw down the remaining $50.0 million at specified dates and amounts which coincide with the expiration of the interest rate swap agreements currently outstanding under the Company's existing revolving credit facility. The initial $25.0 million borrowing under this note was used to pay down a portion of the existing revolving credit facility.
In January 2004, the underwriters of the Company's December 2003 common stock offering exercised their over-allotment option, and purchased an additional 214,625 shares$10.0 million during the first quarter of 2005, and is scheduled to draw the Company's common stock at $24.75 per share. Net proceeds toremainder during the Company fromthird quarter of 2005. At June 30, 2005 the purchasetotal principal balance of these additional shares were approximately $5.0this private placement debt aggregated $65.0 million, and were used to further reducenone of which is due within the Company's outstanding debt. current fiscal year.
For the third quarter and remainder of 2004,2005, the Company continues to focusedfocus on maximizing positive cash flow and working capital management. The Company is currently examining ways to optimize its existing capital structure, particularly the debt component, in light of the Company's long-term growth and acquisition initiatives. The Company is looking to put in place a capital structure which provides the Company with the capability to engage in larger and potentially more complex acquisitions, while still providing the flexibility to run the day-to-day operations of the business. Additionally, the Company broadly estimates the cost of Sarbanes-Oxley compliance, which does not include internal resources, will range between $2.0 million and $3.0 million for the upcoming year-ending December 31, 2004. As of June 30, 2004,2005, 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 principlesU.S. generally accepted in the United States of Americaaccounting principles 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, 2003,2004, as filed on Form 10-K.
Recent Accounting Pronouncements
The Company's most criticalFinancial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment, in December 2004. SFAS No. 123R is a revision of FASB Statement 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. The Statement focuses primarily on accounting policies include: valuation of accounts receivable,for transactions in which impacts selling, general and administrative expense; valuation of inventory, which impactsan entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of sales and gross margin; and the assessmentemployee services received in exchange for an award of recoverability of goodwill and other intangible and long-lived assets, which impacts write-offs of goodwill, intangibles and long-lived assets. Management reviews the estimates, including, but not limited to, the allowance for doubtful accounts and inventory reserves on a regular basis and makes adjustments based on historical experiences, current conditions and future expectations. The reviews are performed regularly and adjustments are made as required by current available information. Management believes these estimates are reasonable, but actual results could differ from these estimates.
The Company's accounts receivable represent those amounts which have been billed to the Company's customers but not yet collected. Management analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is establishedequity instruments based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized.
The Company states its inventories at lower of cost or market. The cost basis of the Company's inventory is determined on a first-in-first-out basis using either actual costs or a standard cost methodology which approximates actual cost.
Intangible assets with estimable useful lives (which consist primarily of non-competition agreements) are amortized to their residual values over those estimated useful lives in proportion to the economic benefit consumed.
Long-lived assets with estimable useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and exceeds its fair market value. This circumstance exists if the carrying amount of the asset in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss would be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by discounted cash flow method or in the case of negative cash flow, an independent market appraisal of the asset.
Goodwill is tested annually, or sooner if indicators of impairment exist, for impairment at the reporting unit level by comparing thegrant-date fair value of the reporting unit with its carrying value. A reporting unitaward (with limited exceptions). That cost will be recognized over the period during which an employee is eitherrequired to provide service in exchange for the sameaward. This statement is effective as or one level below, an operating segment. The primary valuation method for determining the fair value of the reporting unit is a discounted cash flows analysis. If the goodwill is indicated as being impaired (the fair valuebeginning of the first annual reporting unit is less than the carrying amount), the fair value of the reporting unit would then be allocated to its assetsperiod that begins after June 15, 2005 and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill would then be compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognizewill adopt the standard in the third quarter of fiscal 2005. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs; an impairment loss.
amendment of ARB No. 43, Chapter 4, (SFAS 151) which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The projectionprovisions of future cash flowsSFAS No. 151 are effective for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the reporting unitsfiscal years beginning after June 15, 2005 and the future cash outlays related to those revenues. Actual revenues and related cash flows, changesCompany will adopt this standard in anticipated revenues and related cash flowsthe first quarter of fiscal 2006. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or useresults of different assumptions could result in changes in this assessment.operations.
Related Party Transactions
In connection with the acquisition of Construction Metals in April 2003, 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 three equal annual principal installments of approximately $2.9 million per note beginning on April 1, 2004, 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 June 30, 2005 and 2004, the current portion of these notes aggregated approximately $5,833,000. Accrued interest and interest expense related to these notes payable was approximately $73,000 and $145,000 as of and for the quarter ended June 30, 2005 and 2004, respectively. Interest expense related to these notes was $217,000 and $359,000 for the six months ended June 30, 2004. At June 30,2005 and 2004, the current portion of these notes payable aggregated approximately $5.8 million.respectively.
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 $741,000 and $552,000 for the six months ended June 30, 2004.2005 and 2004, respectively
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.
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, 2003.2004.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure 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 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, 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.
(b) Changes in Internal Controls
The Company converted its existing legacy manufacturing and accounting system to a new integrated ERP system at one of its subsidiaries during the quarter ended June 30, 2005, and plans to convert two other subsidiaries to this new system in the next twelve months. The completion of this system implementation at these subsidiaries should enhance our internal controls as follows:
a. The Axiom ERP system will reduce the number of platforms used to record, summarize and report results of operations and financial position; integrate various databases into consolidated files; and reduce the number of manual processes employed by the Company;
b. The Company has designed new processes and implemented new policies and procedures in connection with the conversion.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.Exhibits.
6(a) Exhibits
a. Exhibit 31.1 - Certification of Chief Executive Officer and Chairman of the Board pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
b. Exhibit 31.2 - Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
c. Exhibit 31.3 - Certification of Executive Vice President, Chief Financial Officer and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
d. Exhibit 32.1 - Certification of the Chief Executive Officer and Chairman of the Board pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
e. Exhibit 32.2 - Certification of the President pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
f. Exhibit 32.3 - Certification of the Executive Vice President, Chief Financial Officer, and Treasurer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
g. 10.1 Credit Agreement among Gibraltar Industries, Inc., Gibraltar Steel Corporation of New York and KeyBank National Association and the other lenders named therein, dated as of April 1, 2005 (incorporated by reference to Exhibit 10.1 - Senior Securedto the Company's Current Report on Form 8-K dated April 1, 2005)
h. 10.2 Amended and Restated Note Purchase Agreement betweenamong Gibraltar Industries, Inc., Gibraltar Steel Corporation of New York and the Company and The Prudential Insurance Company of America.
6(b) Reports on Form 8-K. The Company filedAmerica dated as of April 1, 2005 (incorporated by reference to Exhibit 10.2 to the following reportsCompany's Current Report on Form 8-K during the six month period ended June 30, 2004:dated April 1, 2005)
a. Thei. 10.3 Amended and Restated Subordinated Note Purchase Agreement among Gibraltar Industries, Inc., Gibraltar Steel Corporation of New York and the Prudential Insurance Company furnished a reportof America dated as of April 1, 2005 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K ondated April 26, 2004, that included1, 2005)
j. 10.4 Amended and Restated Note Purchase Agreement among Gibraltar Industries, Inc., Gibraltar Steel Corporation of New York and the Prudential Insurance Company of America and Pruco Life Insurance Company dated as of April 1, 2005 (incorporated by reference to Exhibit 10.4 to the Company's press releaseCurrent Report on Form 8-K dated April 26, 2004 reporting the Company's results of operations for the first quarter ended March 31, 2004.
1, 2005)
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 CORPORATIONINDUSTRIES, INC.
(Registrant)
| /s/ Brian J. Lipke |
|
|
| Chief Executive Officer and |
|
|
| /s/ Henning Kornbrekke |
| Henning Kornbrekke |
| President |
| /s/ David W. Kay |
| David W. Kay |
| Executive Vice President, Chief Financial Officer, |
| and Treasurer |
Date: August 10, 2004
9, 2005