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