10-Q 1 d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Commission File Number 333-132918

 

 

FLAG INTERMEDIATE HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-3779375

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Commission File Number 001-13123

 

 

METALS USA, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware   76-0533626

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2400 E. Commercial Blvd., Suite 905

Fort Lauderdale, Florida

  33308
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (954) 202-4000

 

 

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  ¨    No  ¨

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock outstanding at August 12, 2011 of Flag Intermediate Holdings Corporation.: 100

 

 

 


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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

 

   

projected operating or financial results, including anticipated cash flows from operations and asset sale proceeds;

 

   

expectations regarding capital expenditures, interest expense and other payments;

 

   

our beliefs and assumptions relating to our liquidity position, including our ability to adapt to changing market conditions; and

 

   

our ability to compete effectively for market share with industry participants.

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, among others:

 

   

supply, demand, prices and other market conditions for steel and other commodities;

 

   

the timing and extent of changes in commodity prices;

 

   

the effects of competition on our business lines;

 

   

the condition of the steel and metal markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

 

   

the ability of our counterparties to satisfy their financial commitments;

 

   

tariffs and other government regulations relating to our products and services;

 

   

adverse developments in our relationship with both our key employees and unionized employees;

 

   

operational factors affecting the ongoing commercial operations of our facilities, including catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs, unanticipated changes in fuel costs or availability of fuel emission credits or workforce issues;

 

   

our ability to operate our businesses efficiently, manage capital expenditures and costs (including general and administrative expenses) and generate earnings and cash flow;

 

   

restrictive covenants in our indebtedness that may adversely affect our operational flexibility;

 

   

general political conditions and developments in the United States and in foreign countries whose affairs affect supply, demand and markets for steel, other metals and metal products;

 

   

our ability to retain key employees; and

 

   

our expectations with respect to our acquisition activity.

In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as otherwise required by applicable law.

 

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FLAG INTERMEDIATE HOLDINGS CORPORATION AND

SUBSIDIARIES

TABLE OF CONTENTS

 

   PART I—FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

  
  

Unaudited Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010

     4   
  

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010

     5   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

     6   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 4.

  

Controls and Procedures

     48   
   PART II—OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     50   

Item 1A.

  

Risk Factors

     50   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     50   

Item 3.

  

Defaults Upon Senior Securities

     50   

Item 4.

  

(Removed and Reserved)

     50   

Item 5.

  

Other Information

     50   

Item 6.

  

Exhibits

     51   

Signatures

     52   

Exhibit Index

  

 

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FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

 

     June 30,
2011
     December 31,
2010
 

Assets

     

Current assets:

     

Cash

   $ 9.2       $ 15.2   

Accounts receivable, net of allowance of $6.7 and $5.9, respectively

     232.4         149.3   

Inventories

     356.0         290.8   

Deferred income tax asset

     12.0         12.0   

Prepayments and other

     5.8         9.8   
  

 

 

    

 

 

 

Total current assets

     615.4         477.1   

Property and equipment, net

     240.2         198.8   

Intangible assets, net

     28.0         7.4   

Goodwill

     55.1         47.3   

Other assets

     13.0         13.5   
  

 

 

    

 

 

 

Total assets

   $ 951.7       $ 744.1   
  

 

 

    

 

 

 

Liabilities and Stockholder’s Equity

     

Current liabilities:

     

Accounts payable

   $ 95.4       $ 66.6   

Accrued liabilities

     33.5         31.6   

Payable to parent

     9.7         9.6   

Current portion of long-term debt

     1.5         1.1   
  

 

 

    

 

 

 

Total current liabilities

     140.1         108.9   

Long-term debt, less current portion

     480.6         345.4   

Deferred income tax liability

     71.3         62.5   

Due to parent

     47.0         47.0   

Other long-term liabilities

     21.8         22.2   
  

 

 

    

 

 

 

Total liabilities

     760.8         586.0   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholder’s equity:

     

Common stock, $0.01 par value, 100 shares authorized, issued and outstanding at June 30, 2011 and December 31, 2010

     —           —     

Additional paid-in capital

     127.8         127.0   

Retained earnings

     62.6         30.7   

Accumulated other comprehensive income

     0.5         0.4   
  

 

 

    

 

 

 

Total stockholder’s equity

     190.9         158.1   
  

 

 

    

 

 

 

Total liabilities and stockholder’s equity

   $ 951.7       $ 744.1   
  

 

 

    

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
         2011              2010             2011            2010     

Net sales

   $ 505.6       $ 335.0       $ 937.9       $ 622.9   

Operating costs and expenses:

           

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

     382.9         257.2         712.6         475.6   

Operating and delivery

     45.9         32.9         87.0         64.2   

Selling, general and administrative

     27.8         19.8         54.6         40.8   

Depreciation and amortization

     5.6         4.4         10.4         9.0   

Loss (gain) on sale of property and equipment

     —           —           0.1         (0.1

Advisory agreement termination charge

     —           3.3         —           3.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     43.4         17.4         73.2         30.1   

Other expense:

           

Interest expense

     11.9         8.3         21.7         17.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     31.5         9.1         51.5         12.2   

Provision for income taxes

     11.5         3.8         19.6         5.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 20.0       $ 5.3       $ 31.9       $ 6.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

     Six Months Ended
June 30,
 
         2011             2010      

Cash flows from operating activities:

    

Net income

   $ 31.9      $ 6.7   

Adjustments to reconcile net income to net cash used in operating activities:

    

Loss (gain) on sale of property and equipment

     0.1        (0.1

Provision for bad debts

     1.6        1.1   

Depreciation and amortization

     11.4        10.0   

Amortization of debt issuance costs

     1.4        1.7   

Deferred income taxes

     8.7        0.6   

Excess tax benefit from stock-based compensation

     —          (0.1

Stock-based compensation

     0.8        0.2   

Advisory agreement termination charge

     —          3.3   

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     (67.5     (30.0

Inventories

     (47.1     (36.7

Prepayments and other

     4.1        2.2   

Accounts payable and accrued liabilities

     6.7        25.6   

Other

     1.0        —     
  

 

 

   

 

 

 

Net cash used in operations

     (46.9     (15.5
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Sales of assets

     0.1        0.2   

Purchases of assets

     (3.7     (1.4

Acquisition costs, net of cash acquired

     (88.4     (19.0
  

 

 

   

 

 

 

Net cash used in investing activities

     (92.0     (20.2
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings on credit facility

     176.5        49.5   

Repayments on credit facility

     (42.4     (49.5

Repayments of long-term debt

     (0.3     —     

Deferred financing costs

     (0.9     —     

Excess tax benefit from stock-based compensation

     —          0.1   

Advances from parent

     —          41.0   
  

 

 

   

 

 

 

Net cash provided by financing activities

     132.9        41.1   
  

 

 

   

 

 

 

Net (decrease) increase in cash

     (6.0     5.4   

Cash, beginning of period

     15.2        5.5   
  

 

 

   

 

 

 

Cash, end of period

   $ 9.2      $ 10.9   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 22.3      $ 17.8   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 11.2      $ 0.8   
  

 

 

   

 

 

 

Cash received for income taxes

   $ (0.4   $ (8.8
  

 

 

   

 

 

 

Investments in property and equipment not paid

   $ 0.1      $ —     
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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FLAG INTERMEDIATE HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in millions)

1. Basis of Presentation and Summary of Significant Accounting Policies

Flag Intermediate Holdings Corporation (“Flag Intermediate”) and its 100% wholly owned subsidiary Metals USA, Inc. (“Metals USA”) and the 100% wholly owned subsidiaries of Metals USA are referred to collectively herein as the “Company,” “we” or “our.” Metals USA prior to its November 30, 2005 acquisition by Apollo Management V L.P. (“Apollo Management” and together with its affiliated investment entities “Apollo” or “Apollo V”) (the “Merger”) is referred to herein as the “Predecessor Company.” The condensed consolidated financial statements include the accounts of Flag Intermediate, and Metals USA and its subsidiaries. Intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. Flag Intermediate and Metals USA are 100% wholly owned subsidiaries of Metals USA Holdings Corp. (“Metals USA Holdings”).

The interim condensed consolidated financial statements included herein are unaudited; however, they include adjustments of a normal recurring nature which, in our opinion, are necessary to present fairly the interim condensed consolidated financial information as of and for the periods indicated. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.

Fair Value of Financial Assets and Liabilities—Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s interest rate swap derivatives are valued using market data which is derived by combining certain inputs with quantitative models and processes to generate interest rate forward curves and discount factors (see Note 5).

Level 3—Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

 

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Liabilities measured at fair value on a recurring basis are summarized below:

 

     June  30,
2011
     Fair Value Measurements  at
Reporting Date Using
 
      Level 1      Level 2      Level 3  

Interest rate swaps

   $ 0.5       $ —         $ 0.5       $ —     
     December 31,
2010
                      

Interest rate swaps

   $ 2.3       $ —         $ 2.3       $ —     

Our receivables, payables, prepayments and accrued liabilities are current assets and obligations and, accordingly, the recorded values are believed by management to approximate fair value. Our 11 1/8% Senior Secured Notes due 2015 (the “Metals USA Notes”) are thinly traded public debt instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The fair value of publicly traded debt is determined based on quoted market prices. The fair value of the Company’s debt that is not traded and is fixed-rate is estimated by discounting the interest payments and principal amount at the Company’s current borrowing rate (yield to maturity). For floating rate debt that is not traded, fair value is not sensitive to interest rates since coupons float with Treasury or London Interbank Offered Rate (“LIBOR”) yields, and book value is a reasonable approximation of fair value after considering the stability of the Company’s default risk. The estimated fair value of current and long-term debt at June 30, 2011 and December 31, 2010 was $529.9 and $401.8, respectively.

New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29 Business Combinations (Topic 805)—Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”) which amended ASC Topic 805 “Business Combinations” to specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expanded the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and the amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We have disclosed the required information in accordance with ASU 2010-29 as it relates to the Trident acquisition described in Note 2 below.

In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”) which will amend some of the guidance in ASC Topic 220 “Comprehensive Income” regarding how companies must present comprehensive income. The main provisions of ASU 2011-05 provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either a single statement or two separate statements. A single statement would contain the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for all comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for all comprehensive income. The ASU is intended to increase the prominence of other comprehensive income in financial statements and to facilitate convergence of U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-05 are to be applied retrospectively. For public entities, the ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The Company expects to include the expanded disclosures about comprehensive income within its financial statements beginning in the first quarter of 2012.

 

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2. Acquisitions

The Richardson Trident Company

On March 11, 2011, we acquired 100% of the issued and outstanding stock of The Richardson Trident Company (“Trident”). Trident’s results of operations have been included in the condensed consolidated statement of operations since the date of acquisition. Trident is a general line metal service center with fabricating capabilities designed to service the oil and gas industry, and is also a wholesale distributor of metals, plastics and electronic parts. Trident operates under The Richardson Trident Company and The Altair Company trade names. Trident’s principal facility is in Richardson, Texas with branch locations in Houston, Austin, El Paso, Harlingen and Odessa, Texas; Tulsa, Oklahoma; Olathe, Kansas; Los Angeles, California; Boston, Massachusetts and Thomasville, Georgia. The Company paid $90.7 in cash for the stock of Trident, which included $54.2 for the repayment of Trident debt, and $1.8 in the form of a note payable, for a total purchase price of $92.5. The purchase was funded with borrowings under our $500.0 amended and restated senior secured asset-based credit facility due 2015 (the “ABL facility”).

The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $9.2, which was allocated to goodwill. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Metals USA and Trident. All of the goodwill was assigned to the Company’s Flat Rolled and Non-Ferrous Segment (see Note 4). The Trident acquisition was a taxable business combination and as such, the entire amount of the goodwill recognized is expected to be deductible for income tax purposes.

The estimated amount of goodwill and related allocations of the fair values assigned to assets acquired and liabilities assumed are based on preliminary data and are subject to change based on the final valuation of tangible and intangible assets. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:

 

Cash

   $ 2.3   

Accounts receivable, trade

     17.2   

Inventories

     18.1   

Other current assets

     0.1   

Property and equipment

     47.8   

Customer list intangible asset

     19.0   

Trade name intangible asset

     3.3   

Goodwill

     9.2   
  

 

 

 

Total assets acquired

     117.0   
  

 

 

 

Accounts payable and accrued liabilities

     24.5   

Note payable

     1.8   
  

 

 

 

Total liabilities assumed

     26.3   
  

 

 

 

Net assets acquired

   $ 90.7   
  

 

 

 

Results for the six months ended June 30, 2011 include operating results from the Trident acquisition from the date of the acquisition closing, which occurred on March 11, 2011. Trident contributed $39.1 and $48.3 of incremental sales and $2.5 and $3.0 of incremental operating income for the three and six months ended June 30, 2011, respectively. Acquisition-related costs for the six months ended June 30, 2011 amounted to approximately $1.4 million, and are included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations. The customer list intangible asset will be amortized on an accelerated basis over twelve years based on its estimated useful life.

Trident provides a broad range of metals and processing services with a product mix that emphasizes aluminum, stainless steel and nickel. The majority of Trident’s customer base operates in the oil and gas services sector. Trident also serves customers in the aerospace, defense and transportation industries. Processing services

 

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include precision sawing, boring, honing, slitting, sheeting, shearing and tuning. Trident also offers supply chain solutions such as just-in-time delivery and value-added components required by original equipment manufacturers. As a result of the acquisition, we expect to increase our non-ferrous and value-added processing product and service offerings in the geographic areas and end markets that Trident currently serves.

The following unaudited pro forma information presents our consolidated results of operations as if the Trident acquisition had occurred on January 1, 2010, after the effect of certain adjustments, including increased depreciation expense resulting from recording fixed assets at fair value, interest expense on the acquisition debt, amortization of certain identifiable intangible assets, severance costs for certain Trident employees that were terminated as of the acquisition date, certain other non-recurring costs that we will not incur after taking control of Trident, and a provision for income taxes for Trident, which was previously treated as an S-Corporation.

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
         2011              2010              2011              2010      

Net sales

   $ 505.6       $ 371.8       $ 963.6       $ 694.7   

Net income

   $ 20.0       $ 6.5       $ 31.8       $ 9.3   

Ohio River Metal Services

On December 31, 2010, we acquired all of the issued and outstanding stock of Ohio River Metal Services (“ORMS”), located in Jeffersonville, Indiana. The results of operations of ORMS have been included in the condensed consolidated statement of operations since the date of acquisition. ORMS operates a flat rolled metal service center that provides metal products and processing services to customers throughout the Ohio River Valley area. The purchase price for ORMS was $17.8, including the assumption of $8.4 of long-term debt, and was funded with borrowings under the ABL facility. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $0.4, which was allocated to goodwill. The estimated amount of goodwill and related allocations of the fair values assigned to assets acquired and liabilities assumed are based on preliminary data and are subject to change based on the final valuations. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:

 

Accounts receivable, trade

   $ 2.6   

Inventories

     5.0   

Other current assets

     0.1   

Property and equipment

     18.3   

Fulfillment contract intangible asset

     0.8   

Goodwill

     0.4   
  

 

 

 

Total assets acquired

     27.2   
  

 

 

 

Accounts payable and accrued liabilities

     5.6   

Long-term debt

     8.4   

Interest rate swaps

     0.5   

Deferred tax liabilities

     3.3   
  

 

 

 

Total liabilities assumed

     17.8   
  

 

 

 

Net assets acquired

   $ 9.4   
  

 

 

 

The fulfillment contract intangible asset will be amortized on a straight-line basis over fifteen years based on its estimated useful life. The pro forma effects of the ORMS acquisition would not have been material to our results of operations for the three and six months ended June 30, 2010 and, therefore, are not presented.

 

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J. Rubin & Co.

On June 28, 2010, we acquired all of the issued and outstanding stock of J. Rubin & Co. (“J. Rubin”) for $19.0. J. Rubin’s results of operations have been included in the condensed consolidated statement of operations since the date of acquisition. The purchase price was funded with existing cash, $17.8 of which was paid at closing and $1.2 of which was placed in escrow to secure the sellers’ indemnity obligations. The purchase price included $6.0 for the repayment of J. Rubin debt at closing. The excess of the aggregate purchase price over the estimated fair value of the net assets acquired was $3.5, which was allocated to goodwill. The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values:

 

Accounts receivable, trade

   $ 3.8   

Inventories

     5.8   

Other current assets

     0.2   

Property and equipment

     9.7   

Customer list intangible asset

     2.0   

Goodwill

     3.5   
  

 

 

 

Total assets acquired

     25.0   
  

 

 

 

Accounts payable and accrued liabilities

     2.5   

Deferred tax liabilities

     3.5   
  

 

 

 

Total liabilities assumed

     6.0   
  

 

 

 

Net assets acquired

   $ 19.0   
  

 

 

 

The customer list intangible asset is being amortized on an accelerated basis over ten years based on its estimated useful life. The pro forma effects of the J. Rubin acquisition would not have been material to our results of operations for the three and six months ended June 30, 2010 and, therefore, are not presented.

J. Rubin is a metal service center business that operates in Illinois, Wisconsin and Minnesota with a broad product mix consisting of carbon steel bars, carbon plate and laser-cut flat-rolled products. J. Rubin’s product mix and processing services are provided to a diverse range of end markets.

3. Inventories

Inventories consist of the following:

 

     June 30,
2011
     December 31,
2010
 

Raw materials—

     

Plates and Shapes

   $ 145.7       $ 138.6   

Flat Rolled and Non-Ferrous

     158.9         108.3   

Building Products

     5.5         5.4   
  

 

 

    

 

 

 

Total raw materials

     310.1         252.3   
  

 

 

    

 

 

 

Work-in-process and finished goods—

     

Flat Rolled and Non-Ferrous

     34.4         29.3   

Building Products

     11.5         9.2   
  

 

 

    

 

 

 

Total work-in-process and finished goods

     45.9         38.5   
  

 

 

    

 

 

 

Total inventories

   $ 356.0       $ 290.8   
  

 

 

    

 

 

 

 

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4. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill by segment for the six months ended June 30, 2011 are as follows:

 

     As of
December 31,
2010
    Acquisitions/
Purchase
Accounting
Adjustments
     Realization of
Tax Benefits
    Currency
Translation
     As of
June 30,
2011
 

Plates and Shapes

            

Gross Goodwill and

            

Carrying Amount of Goodwill

   $ 14.9      $ —         $ (0.2   $ —         $ 14.7   

Flat Rolled and Non-Ferrous

            

Gross Goodwill and

            

Carrying Amount of Goodwill

     24.4        9.2         —          —           33.6   

Building Products

            

Gross Goodwill and

            

Carrying Amount of Goodwill

     2.2        —           —          0.1         2.3   

Corporate

            

Gross Goodwill

     10.0        —           (1.3     —           8.7   

Impairments

     (4.2     —           —          —           (4.2
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Carrying Amount of Goodwill

     5.8        —           (1.3     —           4.5   

Consolidated Total

            

Gross Goodwill

     51.5        9.2         (1.5     0.1         59.3   

Impairments

     (4.2     —           —          —           (4.2
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Carrying Amount of Goodwill

   $ 47.3      $ 9.2       $ (1.5   $ 0.1       $ 55.1   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Additions to goodwill recorded at the Flat Rolled and Non-Ferrous segment for the six months ended June 30, 2011 are attributable to the Trident acquisition, which closed on March 11, 2011, discussed in Note 2. Reductions to goodwill at the Corporate and Plates and Shapes segments for the six months ended June 30, 2011 are due to the realization of tax benefits for tax-deductible goodwill recognized in connection with the Merger and the acquisition of Port City Metal Services (“Port City”) in May 2006, both of which were taxable business combinations. Changes in goodwill at the Building Products segment for the six months ended June 30, 2011 are due to the effects of foreign currency.

The carrying amounts of the Company’s intangible assets are as follows:

 

     June 30,
2011
    December 31,
2010
 

Customer lists

   $ 61.8      $ 42.8   

Less: Accumulated amortization

     (40.2     (38.8
  

 

 

   

 

 

 
   $ 21.6      $ 4.0   
  

 

 

   

 

 

 

Trade names

   $ 6.6      $ 3.3   

Less: Accumulated amortization

     (1.0     (0.7
  

 

 

   

 

 

 
   $ 5.6      $ 2.6   
  

 

 

   

 

 

 

Fulfillment contract

   $ 0.8      $ 0.8   

Less: Accumulated amortization

     —          —     
  

 

 

   

 

 

 
   $ 0.8      $ 0.8   
  

 

 

   

 

 

 

 

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During the six months ended June 30, 2011, we acquired $19.0 of customer list intangible assets and $3.3 of trade name intangible assets as a result of the Trident acquisition discussed in Note 2.

Aggregate amortization expense for the three months ended June 30, 2011 and 2010 was $0.9 and $1.0, respectively. Aggregate amortization expense for the six months ended June 30, 2011 and 2010 was $1.7 and $1.4, respectively.

Aggregate remaining amortization of our intangible assets is as follows:

 

For the Year Ending December 31,

   Estimated
Amortization
Expense
 

2011 (remaining 6 months)

   $ 1.3   

2012

   $ 3.6   

2013

   $ 3.5   

2014

   $ 3.3   

2015

   $ 3.0   

Thereafter

   $ 13.3   

5. Derivatives

In February 2008, $250.0 million notional amount of outstanding borrowings under the ABL facility were swapped from a floating LIBOR-based rate to a fixed rate. The swaps entitled us to receive quarterly payments of interest at a floating rate indexed to three-month LIBOR and pay a fixed rate that ranged from 2.686% to 2.997%, converting a portion of the outstanding borrowings on our ABL facility from a floating rate obligation to a fixed rate obligation. Pretax realized gains and losses from the Company’s ABL facility interest rate swaps which were recognized in earnings during the six months ended June 30, 2011 amounted to $0.1 of additional interest expense, consisting of $1.8 of settlements, offset by $1.7 of changes in the fair value of derivatives. The Company’s ABL facility interest rate swaps expired during the second quarter of 2011.

In November 2004 and December 2007, ORMS, which we acquired on December 31, 2010, entered into two separate interest rate swap agreements in connection with the Jeffersonville, Indiana Industrial Revenue Bonds (“IRBs”) discussed in Note 8. The notional amounts under these swaps correspond to the principal amounts of the IRBs, which were a combined $7.7 as of June 30, 2011, and are reduced on an annual basis as the IRBs are redeemed. Under the swaps, the notional amounts under the Jeffersonville IRBs were swapped from a floating rate based on a rate established by the Securities Industry and Financial Market Association (“SIFMA”) to fixed rates of 4.00% and 3.75%, converting the outstanding borrowings on the Jeffersonville IRBs from floating rate obligations to fixed rate obligations. Pretax realized gains and losses from the Company’s Jeffersonville IRB interest rate swaps recognized in earnings during the six months ended June 30, 2011 were not material, with approximately $0.1 of settlements that were partially offset by changes in the fair value of derivatives.

We account for gains and losses on our interest rate swap derivatives based on realized and unrealized amounts. Realized gains and losses are determined by actual derivative settlements during the period. Unrealized gains and losses are based on the periodic mark to market valuation of our derivative contracts in place. The primary objective for our use of interest rate swaps is to reduce our exposure to changes in interest rates and to manage variable interest rate exposure to achieve greater flexibility in meeting overall financial objectives.

 

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The following table presents the location within the condensed consolidated balance sheet of all assets and liabilities associated with the Company’s outstanding derivatives at June 30, 2011 and December 31, 2010.

 

        Asset Derivatives     Liability Derivatives  

Derivatives not designated as
hedging instruments under
ASC 815

 

Balance Sheet Location

  Fair Value at
June 30,
2011
    Fair Value at
December 31,
2010
    Fair Value at
June 30,
2011
    Fair Value at
December 31,
2010
 

Interest rate swaps

  Accrued liabilities   $  —        $ —        $ 0.1      $ 1.9   
 

Other long-term liabilities

    —          —          0.4        0.4   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as hedging instruments under ASC 815

    $ —        $ —        $ 0.5      $ 2.3   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives

    $ —        $ —        $ 0.5      $ 2.3   
   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the pretax impact of the Company’s derivative instruments within the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010. Pretax realized gains and losses from derivatives which are recognized in earnings are included in interest expense in the condensed consolidated statements of operations.

 

     Derivatives Not Designated as Hedging Instruments  
     Amount Recognized as Interest Expense from Derivatives  
     Three months ended
June 30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

Interest rate swaps

   $ 0.1       $ 0.3       $ 0.2       $ 1.7   

The Company’s credit exposure related to interest rate swaps is represented by the fair value of swap agreements with a net positive fair value (asset position) to the Company at the reporting date. At such times, the outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparty to the agreements. However, we have not experienced any credit loss as a result of counterparty nonperformance in the past. Our credit risk exposure with respect to our interest rate swaps is limited to a single counterparty, which we monitor based on credit ratings. As of June 30, 2011, our interest rate swap derivatives had net negative fair values (liability positions).

6. Other Assets

Other assets consist of the following:

 

     June 30,
2011
     December 31,
2010
 

Deferred financing costs

   $ 8.7       $ 8.9   

Deferred debt offering costs

     3.2         3.6   

Other

     1.1         1.0   
  

 

 

    

 

 

 

Total other assets

   $ 13.0       $ 13.5   
  

 

 

    

 

 

 

Aggregate amortization of debt issuance costs for the three and six months ended June 30, 2011 was $0.7 and $1.4, respectively. Aggregate amortization of debt issuance costs for the three and six months ended June 30, 2010 was $0.8 and $1.7, respectively.

 

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7. Accrued Liabilities

Accrued liabilities consist of the following:

 

     June 30,      December 31,  
     2011      2010  

Salaries and employee benefits

   $ 14.2       $ 10.8   

Income taxes

     2.3         3.1   

Taxes, other than income

     2.1         2.8   

Interest

     2.7         3.3   

Insurance

     5.4         5.2   

Audit and tax fees

     0.9         0.5   

Warranty liability

     0.6         0.5   

Lease terminations

     0.3         0.4   

Merger consideration—Predecessor Company common shares outstanding

     —           0.6   

Current portion of interest rate swap liability

     0.1         1.9   

Other

     4.9         2.5   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 33.5       $ 31.6   
  

 

 

    

 

 

 

8. Debt

Debt consists of the following:

 

     June 30,
2011
     December 31,
2010
 

Senior Secured Asset-Based Revolving Credit Facility (ABL facility)

   $ 240.1       $ 106.0   

11 1/8% Senior Secured Notes due 2015 (Metals USA Notes)

     226.3         226.3   

Industrial Revenue Bonds (IRBs)

     13.4         13.4   

Due to Parent

     47.0         47.0   

Obligations under capital leases and other

     2.3         0.8   
  

 

 

    

 

 

 

Total debt

     529.1         393.5   

Less—current portion of debt

     1.5         1.1   
  

 

 

    

 

 

 

Total long-term portion of debt

   $ 527.6       $ 392.4   
  

 

 

    

 

 

 

The weighted average interest rates under the ABL facility for the three and six months ended June 30, 2011 were 3.05% and 3.14%, respectively. The weighted average interest rates under the ABL facility for the three and six months ended June 30, 2010 were 1.99% and 2.04%, respectively.

Senior Secured Asset-Based Revolving Credit Facility

On December 17, 2010, Flag Intermediate, Metals USA, and certain subsidiaries of Metals USA entered into an amended and restated loan and security agreement (the “ABL Credit Agreement”) with the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. Flag Intermediate and Metals USA are 100% wholly-owned subsidiaries of Metals USA Holdings Corp.

The ABL Credit Agreement provides for a new $500.0 (which may be increased up to $750.0 at the option of Metals USA, including up to $35.0 under a first-in last-out (“FILO”) tranche)), 5-year, senior secured asset-based credit facility (the “ABL facility”) that amended and restated Metals USA’s then-existing $625.0 senior secured asset-based credit facility that was scheduled to mature on November 30, 2011.

 

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On March 9, 2011, we activated $25.0 of the FILO tranche under the ABL facility. The ABL facility permits us to borrow on a revolving basis through the earlier of November 30, 2015 and 60 days prior to the scheduled maturity of the Metals USA Notes, unless the Metals USA Notes are refinanced to a date more than 5 years and 60 days after the closing date of the ABL facility and/or repaid prior to such date. Substantially all of our subsidiaries are borrowers under the ABL facility.

On August 10, 2011, we amended the ABL facility by reducing the borrowing costs on the Tranche A Commitments by 75 basis points and reducing the borrowing costs on the FILO Tranche by 62.5 basis points. Under the amendment, the maturity date of the ABL facility was extended to the earlier of August 10, 2016 and 60 days prior to the scheduled maturity of the Metals USA Notes, unless the Metals USA Notes are refinanced to a date more than 5 years and 60 days after the closing date of the ABL facility and/or repaid prior to such date. The ABL facility remains subject to the same acceleration provision with respect to the maturity of the Metals USA Notes described above.

Borrowing Base. The maximum availability under the ABL facility is based on eligible receivables and eligible inventory, subject to certain reserves. Our borrowing availability fluctuates daily with changes in eligible receivables and inventory, less outstanding borrowings and letters of credit. The borrowing base is equal to:

 

   

85% of the net amount of eligible accounts receivable, plus

 

   

the lesser of (x) 80% of the lesser of the original cost or market value of eligible inventory and (y) 90% of the net orderly liquidation value of eligible inventory, plus

 

   

an incremental amount of the lesser of (x) the maximum commitments under the FILO tranche and (y) the sum of (i) 5% of the net amount of eligible accounts receivable and (ii) 5% of the net orderly liquidation value of eligible inventory during the effectiveness of any FILO tranche, less

 

   

reserves.

The ABL facility provides sub-limits for up to $25.0 of swingline loans and up to $100.0 for the issuance of letters of credit. Both the face amount of any outstanding letters of credit and any swingline loans will reduce borrowing availability under the ABL facility on a dollar-for-dollar basis.

As of June 30, 2011, we had $426.6 of eligible collateral, $240.1 in outstanding advances, $23.0 in open letters of credit and $163.5 of additional borrowing capacity.

Guarantees and Security. Substantially all of our subsidiaries are defined as “borrowers” under the ABL Credit Agreement. The obligations under the ABL facility are guaranteed by Flag Intermediate and certain of our domestic subsidiaries and are secured by a first-priority lien and security interest in, among other things, accounts receivable, inventory and deposit accounts of Flag Intermediate, Metals USA and the subsidiaries of Metals USA party to the ABL Credit Agreement and a second-priority lien and security interest in, among other things, substantially all other tangible and intangible personal and real property owned by such companies, subject to certain exceptions.

Interest Rate and Fees. At Metals USA’s option, interest accrues on the loans made under the ABL facility at either LIBOR plus a specified margin (set at 2.50% (3.875% for the FILO tranche) as of June 30, 2011), or the base rate (which is based off of the federal funds rate plus 0.50%, Bank of America’s prime rate or LIBOR plus 1.00%), plus a specified margin (set at 1.50% (2.875% for the FILO tranche) as of June 30, 2011). Under the ABL facility amendment that was executed on August 10, 2011, the specified margins over LIBOR were reduced by 75 basis points for the Tranche A Commitments and 62.5 basis points for the FILO tranche. The marginal rates vary based on our average monthly excess availability (as defined in the ABL Credit Agreement). The applicable base rate and the effective LIBOR rate for the loans made under the ABL facility were 3.25% and 0.246%, respectively, as of June 30, 2011.

 

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A commitment fee is payable on any unused commitment equal to 0.25% per annum to the lenders under the ABL facility if utilization under the facility exceeds 40.0% of the total commitments under the facility and a commitment fee equal to 0.375% per annum if utilization under the facility is less than or equal to 40.0% of the total commitments under the facility. Customary letter of credit fees are also payable, as necessary.

Certain Conditions Precedent and Covenants. As a condition precedent to any borrowing or issuance of a letter of credit, a material adverse effect shall not have occurred or exist. The ABL facility contains customary representations, warranties and covenants, including limitations on our ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases, with respect to capital stock, repay debt, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales, and engage in certain transactions with affiliates. The ABL facility requires a lock-box arrangement for collection of accounts receivable and proceeds from sales of inventory. Metals USA may make withdrawals from the lock-box unless an event of default exists or borrowing availability is less than the greater of (i) $50.0 and (ii) 12.5% of the lesser of (A) the borrowing base (not to exceed $62.5) and (B) the aggregate commitment. We do not have to maintain a minimum fixed charge coverage ratio (“FCCR”) as long as our borrowing availability is greater than or equal to the greater of (i) $45.0 and (ii) 10% of the lesser of the borrowing base and the aggregate commitment (the “Minimum Availability”). We must maintain an FCCR of at least 1.0 to 1.0 if borrowing availability falls below the Minimum Availability. For purposes of determining covenant compliance, the FCCR is determined by dividing (i) the sum of Adjusted EBITDA (as defined in the ABL Credit Agreement) minus income taxes paid in cash (excluding certain specified deferred taxes) minus non-financed capital expenditures by (ii) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt, and is calculated based on such amounts for the most recent period of four consecutive fiscal quarters for which financial statements are available. FCCR and Adjusted EBITDA are each calculated on a pro forma basis. As of June 30, 2011, our FCCR was 2.73.

Certain Events of Default and Remedies. The ABL facility contains events of default with respect to: default in payment of principal when due, default in the payment of interest, fees or other amounts after a specified grace period, material breach of the representations or warranties, default in the performance of covenants, a default that causes or permits acceleration under any indebtedness with a principal amount in excess of a specified amount, certain bankruptcy events, certain ERISA violations, invalidity of certain security agreements or guarantees, material judgments, or a change of control. In the event of default, the ABL Credit Agreement may permit a majority of the lenders to: (i) restrict the amount of or refuse to make revolving loans; (ii) cause customer receipts to be applied against borrowings under the ABL facility which would cause Metals USA to suffer a rapid loss of liquidity and restrict the ability to operate on a day-to-day basis; (iii) restrict or refuse to provide letters of credit; or ultimately; (iv) terminate the commitments and the agreement; or (v) declare any or all obligations to be immediately due and payable if such default is not cured in the specified period required. Any payment default or acceleration under the ABL facility would also result in a default under the Metals USA Notes that would provide the holders of the Metals USA Notes with the right to demand immediate repayment.

Costs related to the establishment of the ABL facility, in addition to subsequent amendments to the ABL facility, were capitalized and are being charged to interest expense over the life of the ABL facility. Unamortized financing costs of $8.7 and $8.9 were included in other non-current assets as of June 30, 2011 and December 31, 2010, respectively.

11 1/8% Senior Secured Notes Due 2015

On November 30, 2005, Flag Acquisition Corporation (“Flag Acquisition”) sold $275.0 aggregate principal amount of the Metals USA Notes. The Metals USA Notes bear interest at a rate per annum equal to 11 1/8%, payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on June 1, 2006. The Metals USA Notes will mature on December 1, 2015. We may redeem some or all of the Metals USA Notes at any time on or after December 1, 2010 at a predetermined redemption price plus accrued and unpaid interest and additional interest, if any, to the applicable redemption date. If we experience a change of control and we do not

 

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redeem the Metals USA Notes, we will be required to make an offer to repurchase the Metals USA Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

As a result of the Merger, Metals USA assumed the obligations of Flag Acquisition including the Metals USA Notes. All domestic operating subsidiaries of Metals USA have agreed, jointly and severally with Flag Intermediate (“Guarantors”), to unconditionally and irrevocably guarantee Metals USA’s obligations under the Metals USA Notes and Indenture dated as of November 30, 2005. Additionally, Flag Intermediate has unconditionally guaranteed to be a primary obligor of the due and punctual payment and performance of the obligations under the Indenture.

Metals USA Holdings is not a guarantor of the Metals USA Notes. There is a limitation on the amount of funds which can be transferred by the Guarantors to Metals USA Holdings in the form of dividends. Such amount available for distribution shall be increased by an amount equal to 50% of Consolidated Net Income, as defined, or reduced by an amount equal to 100% of Consolidated Net Loss, as defined. As of June 30, 2011, $3.4 was available for general distribution under the restricted payment covenant contained in the Indenture governing the Metals USA Notes.

The indebtedness evidenced by the Metals USA Notes and the guarantees will rank: equally with all of our and the Guarantors’ existing and future senior indebtedness; junior in priority as to collateral that secures the ABL facility on a first-priority lien basis with respect to our and the Guarantors’ obligations under the ABL facility, any other debt incurred after December 1, 2005 that has a priority security interest relative to the Metals USA Notes in the collateral that secures the ABL facility, any hedging obligations related to the foregoing debt and all cash management obligations incurred with any lender under the ABL facility; equal in priority as to collateral that secures the Metals USA Notes and the guarantees on a first-priority lien basis with respect to our and the Guarantors’ obligations under any other equivalent priority lien obligations incurred after December 1, 2005; and senior to all of our and the Guarantors’ existing and future subordinated indebtedness. The Metals USA Notes will also be effectively junior to the liabilities of any non-guarantor subsidiaries.

The Metals USA Notes contain covenants that are customary for debt instruments, including limitations on our or the Guarantors’ ability to incur or guarantee additional debt, subject to certain exceptions, pay dividends, or make redemptions and repurchases with respect to capital stock, create or incur certain liens, make certain loans or investments, make acquisitions or investments, engage in mergers, acquisitions, asset sales and sale lease-back transactions, and engage in certain transactions with affiliates.

The Metals USA Notes Indenture contains certain customary events of default, including (subject, in some cases, to customary cure periods thresholds) defaults based on (1) the failure to make payments under the Metals USA Notes Indenture when due, (2) breach of covenants, (3) cross-defaults to other material indebtedness, (4) bankruptcy events and (5) material judgments.

Costs related to the establishment of the Metals USA Notes were capitalized and are being charged to interest expense over the life of the Metals USA Notes. Unamortized issuance costs of $3.2 and $3.6 were included in other non-current assets as of June 30, 2011 and December 31, 2010, respectively.

Industrial Revenue Bonds

Metals USA is a conduit bond obligor on IRBs issued by the municipalities of Muskogee, Oklahoma and Jeffersonville, Indiana. The IRBs are secured by certain real estate, leasehold improvements and equipment acquired with proceeds from the IRBs. The Muskogee IRB is due in one lump sum of $5.7 on May 1, 2016. The Jeffersonville IRBs had principal amounts outstanding of $3.5 and $4.2 as of June 30, 2011, and are being redeemed in varying amounts annually through August 2021 and December 2027, respectively. The interest rates assessed on the IRBs vary from month to month. As of June 30, 2011, the weighted average variable interest rate

 

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on the IRBs was 0.25%. See Note 5 for a discussion of fixed interest rates payable on the Jeffersonville IRBs under interest rate swap agreements. The IRBs place various restrictions on certain of our subsidiaries, including but not limited to maintenance of required insurance coverage, maintenance of certain financial ratios, limits on capital expenditures and maintenance of tangible net worth and are supported by letters of credit.

Intercompany Loan Agreement

Metals USA Holdings has made advances to Metals USA through an intercompany loan agreement, as amended, (the “Loan Agreement”), which totaled $47.0 as of June 30, 2011 and December 31, 2010. The advances have been primarily to accommodate working capital expansion and the J. Rubin acquisition discussed in Note 2. In June 2011, the Loan Agreement was amended to extend the maturity date to June 15, 2017, and to modify the rate at which borrowings under the Loan Agreement bear interest to LIBOR plus 6.00% per annum. For the three and six months ended June 30, 2011, Metals USA recognized $2.5 and $3.3 of interest expense related to the Loan Agreement.

9. Stockholder’s Equity

Common Stock

In accordance with its certificate of incorporation dated November 3, 2005, Flag Intermediate was authorized to issue 100 shares of capital stock, all of which were shares of common stock, $.01 par value. All such shares are issued and outstanding at June 30, 2011, and are owned by Metals USA Holdings through Flag Intermediate, its 100% wholly-owned subsidiary.

10. Stock-Based Compensation

Total stock-based compensation expense recognized for the three and six months ended June 30, 2011 was $0.4 and $0.8, respectively. Total stock-based compensation expense recognized for the three and six months ended June 30, 2010 was $0.1 and $0.2, respectively. Stock-based compensation expense is included in our condensed consolidated statements of operations in “Selling, general and administrative expense.”

2005 Stock and Incentive Plan

Metals USA Holdings’ Amended and Restated 2005 Stock and Incentive Plan (the “2005 Plan”) permits the issuance of options and restricted stock awards to employees and directors of the Company. The 2005 Plan has reserved for issuance up to 2.4 million shares of common stock. The 2005 Plan has two tranches of options, Tranche A and Tranche B. Tranche A options vest on a pro-rata basis over five years, have a term of ten years, and expire if not exercised. Tranche B options, which include both a service and a performance condition, vest on the eighth anniversary of the date of grant or earlier dependent on the satisfaction of an internal rate of return on capital invested, have a term of ten years from date of grant, and expire if not exercised.

Tranche A Options

As of June 30, 2011, Tranche A options for 404,936 shares were outstanding, 387,505 of which were exercisable. The weighted average exercise price of these options is $3.20 per share, with an aggregate intrinsic value of $4.7. The Tranche A options have a weighted average remaining contractual life of approximately 4.5 years. Compensation expense associated with the Tranche A options has been fully recognized as of June 30, 2011.

Tranche B Options

As of June 30, 2011, Tranche B options for 50,816 shares were outstanding, all of which were exercisable. The weighted average exercise price of these options is $2.30 per share, with an aggregate intrinsic value of $0.6. The Tranche B options have a weighted average remaining contractual life of approximately 4.4 years. Compensation expense associated with the Tranche B options has been fully recognized as of June 30, 2011.

 

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Table of Contents

2010 Long-Term Incentive Plan

On March 19, 2010, Metals USA Holdings’ Board of Directors adopted, and its stockholders approved, the Metals USA Holdings 2010 Long-Term Incentive Plan (the “2010 Plan”). The purposes of the 2010 Plan are to further the growth and success of Metals USA and to reward and incentivize the outstanding performance of our key employees, directors, consultants and other service providers by aligning their interests with those of stockholders through equity-based compensation and enhanced opportunities for ownership of shares of Metals USA Holdings’ common stock.

Subject to adjustment, the 2010 Plan authorizes the issuance of up to 2.6 million shares of common stock pursuant to the grant or exercise of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards.

The 2010 Plan is administered by Metals USA Holdings’ Board of Directors or the Compensation Committee thereof, or such other committee of the Board of Directors as the Board of Directors may designate from time to time (the “Committee”). Among other things, the Committee has the authority to select individuals to whom awards may be granted, to determine the type of award, to determine the terms and conditions of any such awards, including vesting terms, to interpret the terms and provisions of the 2010 Plan and awards granted thereunder and to otherwise administer the plan.

Stock Options

On September 13, 2010, pursuant to the 2010 Plan, 632,000 options to acquire the Metals USA Holdings’ common stock were granted to certain members of our management and to members of the Board of Directors with an exercise price equal to the fair market value as of the date of the grant. The options granted to management vest ratably over four years and have a contractual term of ten years. The options granted to the members of the Board of Directors vest ratably over three years and also have a contractual term of ten years.

The fair value of the 2010 Plan option awards was estimated on the date of grant using a Black-Scholes option valuation model using the following valuation assumptions:

 

Expected dividend yield

     0

Expected stock price volatility

     62.5

Risk free interest rate

     1.51

Expected life (in years)—management options

     5.0   

Expected life (in years)—Board of Director options

     4.0   

Exercise price

   $ 13.17   

As of June 30, 2011, outstanding options granted under the 2010 Plan had an aggregate intrinsic value of $1.1, with approximately $3.1 of total unrecognized compensation expense remaining to be amortized over a weighted average period of 2.9 years.

Restricted Stock

On September 13, 2010, pursuant to the 2010 Plan, 130,100 shares of restricted stock were granted to certain members of our management and to members of our Board of Directors. The awards granted to management vest ratably over four years, while the awards granted to the members of our Board of Directors vest ratably over three years. The fair value of the restricted stock granted was $13.17 per share, determined based on the fair value of the Company’s common stock on the grant date. As of June 30, 2011, approximately $1.3 of total unrecognized compensation expense was expected to be recognized over a weighted average period of 2.8 years.

 

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Table of Contents

11. Income Taxes

The provision for income taxes is determined by applying an estimated annual effective income tax rate to income before income taxes. The rate is based on the most recent annualized forecast of pretax income, permanent book differences and tax credits. The Company’s effective tax rate for the six months ended June 30, 2011 was 38.1% compared to an effective tax rate of 44.9% for the six months ended June 30, 2010. The decrease in the tax rate in 2011 is primarily due to the impact of state taxes and permanent items on the respective levels of pre-tax book income.

As of June 30, 2011, our unrecognized tax benefits totaled $8.7, and based on the contingent and uncertain nature of our liability, we are unable to make an estimate of the period of potential cash settlement, if any, with the respective taxing authorities. The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate is $0.1 for the six months ended June 30, 2011.

We file numerous consolidated and separate income tax returns in the United States and Canada. We are no longer subject to U.S. Federal income tax examinations for years before 2006 and are no longer subject to state and local, or foreign income tax examinations for years before 2000.

We account for any applicable interest and penalties on uncertain tax positions as a component of income tax expense. As of June 30, 2011, the liability for uncertain taxes includes interest and penalties of $2.9 of which $0.1 is included in our statement of operations and impacted the Company’s overall effective income tax rate for the six months ended June 30, 2011.

12. Segment Information

The following tables show summarized financial information for our reportable segments. The amounts shown as an operating loss under the column heading “Corporate and Other” consist primarily of general and administrative costs that are not allocated to the segments. The reconciliation of operating income to net income before income taxes is shown within the condensed consolidated statements of operations and therefore is not separately presented.

 

     Three Months Ended June 30,  
     Plates and
Shapes
     Flat
Rolled and
Non-Ferrous
     Building
Products
     Corporate
and Other
    Total  

2011:

             

Net sales

   $ 206.6       $ 277.5       $ 25.2       $ (3.7   $ 505.6   

Operating income (loss)

     25.1         23.1         1.2         (6.0     43.4   

Capital expenditures

     0.7         0.9         0.1         —          1.7   

Depreciation and amortization(1)

     2.6         2.8         0.5         0.2        6.1   

2010:

             

Net sales

   $ 136.5       $ 177.0       $ 24.3       $ (2.8   $ 335.0   

Operating income (loss)

     11.4         13.2         0.6         (7.8     17.4   

Capital expenditures

     0.7         0.2         —           —          0.9   

Depreciation and amortization(1)

     2.3         1.7         0.6         0.3        4.9   

 

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Table of Contents
     Six Months Ended June 30,  
     Plates
and
Shapes
     Flat
Rolled and
Non-Ferrous
     Building
Products
    Corporate
and Other
    Total  

2011:

            

Net sales

   $ 396.8       $ 506.0       $ 41.4      $ (6.3   $ 937.9   

Operating income (loss)

     47.1         40.2         (0.6     (13.5     73.2   

Capital expenditures

     2.3         1.1         0.1        0.2        3.7   

Depreciation and amortization(1)

     4.9         5.0         1.1        0.4        11.4   

2010:

            

Net sales

   $ 258.4       $ 329.0       $ 40.5      $ (5.0   $ 622.9   

Operating income (loss)

     20.5         24.1         (1.1     (13.4     30.1   

Capital expenditures

     1.1         0.3         —          —          1.4   

Depreciation and amortization(1)

     4.7         3.5         1.2        0.6        10.0   

 

(1) Includes depreciation expense reflected in cost of goods sold for the Building Products Group.

 

     June 30,
2011
     December 31,
2010
 

Total Assets:

     

Plates and Shapes

   $ 358.8       $ 328.1   

Flat Rolled and Non-Ferrous

     512.3         329.8   

Building Products

     41.6         38.7   

Corporate and Other

     39.0         47.5   
  

 

 

    

 

 

 

Consolidated

   $ 951.7       $ 744.1   
  

 

 

    

 

 

 

For the three months ended June 30, 2011, J. Rubin, ORMS and Trident contributed a combined $58.4 and $3.7 of incremental net sales and operating income, respectively, versus the same period of 2010. For the six months ended June 30, 2011, J. Rubin, ORMS and Trident contributed a combined $84.4 and $5.1 of incremental net sales and operating income, respectively, versus the same period of 2010.

During the second quarter of 2011, our Building Products Segment recorded a gain of approximately $0.7 resulting from a settlement with the previous owners of the Dura-Loc (now Allmet) roofing business we acquired in 2006 to cover pre-acquisition warranty claims.

13. Commitments and Contingencies

Letters of Credit

Letters of credit outstanding at June 30, 2011 consist of a letter of credit in the amount of $11.3 in conjunction with the IRBs (see Note 8) and other letters of credit aggregating $11.7 (total letters of credit of $23.0 at June 30, 2011). Other letters of credit consist primarily of collateral support for our property and casualty insurance program. All letters of credit reduce the amount available to borrow under the ABL facility.

Pension Fund Withdrawal Obligation

During 2007, we discontinued our participation in a multiemployer pension fund. In connection with our cessation of contributions to the plan, we were assessed a withdrawal liability of approximately $5.6, which we are paying in monthly installments through 2021. Our total withdrawal liability, including interest and amortization charges, amounted to approximately $6.4 and $6.7 as of June 30, 2011 and December 31, 2010, respectively.

 

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Table of Contents

Contingencies

From time to time, we are involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. We believe the resolution of these matters and the incurrence of their related costs and expenses should not have a material adverse effect on our consolidated financial position, results of operations, cash flows or liquidity.

14. Related Party Transactions

Intercompany Loan Agreement

Metals USA Holdings has made advances to Metals USA through an intercompany loan agreement. See Note 8.

Payable to Parent

In addition, Metals USA has recorded a payable to Metals USA Holdings in the amount of $6.1 for the receipt of a Federal income tax refund during the year ended December 31, 2010.

Other amounts payable to Metals USA Holdings as of June 30, 2011 are the result of routine intercompany transactions.

15. Comprehensive Income

The following table sets forth comprehensive income, net of applicable taxes, for the three and six months ended June 30, 2011 and 2010.

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2011             2010             2011              2010      

Net income

   $ 20.0      $ 5.3      $ 31.9       $ 6.7   

Other comprehensive income:

         

Foreign currency translation adjustments

     (0.1     (0.1     —           —     

Unrealized gains on derivatives

     —          0.1        0.1         0.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 19.9      $ 5.3      $ 32.0       $ 7.1   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

16. Guarantor/Non-Guarantor Subsidiary Financial Information

The following condensed consolidating financial information is for the parent company, Flag Intermediate, a holding company with no assets or operations and Metals USA, a management holding company which owns 100% of the guarantor and non-guarantor subsidiaries.

 

As of June 30, 2011

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Assets

           

Current assets:

           

Cash

  $ —        $ 4.8      $ 3.9      $ 0.5      $ —        $ 9.2   

Accounts receivable

    —          —          231.9        1.2        (0.7     232.4   

Inventories

    —          —          354.8        1.2        —          356.0   

Deferred income tax asset

    —          5.0        7.0        —          —          12.0   

Prepayments and other

    —          0.3        5.5        —          —          5.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          10.1        603.1        2.9        (0.7     615.4   

Property and equipment, net

    —          —          237.8        2.4        —          240.2   

Intangible assets, net

    —          —          27.9        0.1        —          28.0   

Goodwill

    —          4.4        48.5        2.2        —          55.1   

Investment in subsidiaries, net

    190.9        919.4        —          —          (1,110.3     —     

Other assets

    —          11.9        1.1        —          —          13.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 190.9      $ 945.8      $ 918.4      $ 7.6      $ (1,111.0   $ 951.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholder’s Equity

           

Current liabilities:

           

Accounts payable

  $ —        $ —        $ 95.8      $ 0.3      $ (0.7   $ 95.4   

Accrued liabilities

    —          (2.6     35.5        0.6        —          33.5   

Payable to parent

    —          9.7        —          —          —          9.7   

Current portion of long-term debt

    —          0.5        1.0        —          —          1.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          7.6        132.3        0.9        (0.7     140.1   

Long-term debt, less current portion

    —          467.6        13.0        —          —          480.6   

Due to parent

    —          47.0        —          —          —          47.0   

Deferred income tax liability

    —          29.6        41.7        —          —          71.3   

Intercompany payable (receivable)

    —          187.7        (232.2     44.5        —          —     

Other long-term liabilities

    —          15.4        5.9        0.5        —          21.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    —          754.9        (39.3     45.9        (0.7     760.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

           

Stockholder’s equity:

           

Common stock, $.01 par value, 100 shares authorized, issued and outstanding at June 30, 2011

    —          —          —          —          —          —     

Additional paid-in capital

    127.8        127.8        642.6        23.1        (793.5     127.8   

Retained earnings (accumulated deficit)

    62.6        62.6        314.2        (61.4     (315.4     62.6   

Accumulated other comprehensive income

    0.5        0.5        0.9        —          (1.4     0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity (deficit)

    190.9        190.9        957.7        (38.3     (1,110.3     190.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity

  $ 190.9      $ 945.8      $ 918.4      $ 7.6      $ (1,111.0   $ 951.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

As of December 31, 2010

  Flag
Intermediate
Holdings
Corp.
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Assets

           

Current assets:

           

Cash

  $ —        $ 12.5      $ 2.0      $ 0.7      $ —        $ 15.2   

Accounts receivable

    —          0.3        148.1        1.1        (0.2     149.3   

Inventories

    —          —          289.6        1.2        —          290.8   

Deferred income tax asset

    —          12.0        —          —          —          12.0   

Prepayments and other

    —          2.1        7.7        —          —          9.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          26.9        447.4        3.0        (0.2     477.1   

Property and equipment, net

    —          1.9        194.4        2.5        —          198.8   

Intangible assets, net

    —          —          7.1        0.3        —          7.4   

Goodwill

    —          5.8        39.3        2.2        —          47.3   

Investment in subsidiaries, net

    158.1        879.8        —          —          (1,037.9     —     

Other assets

    —          13.0        0.5        —          —          13.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 158.1      $ 927.4      $ 688.7      $ 8.0      $ (1,038.1   $ 744.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholder’s Equity

           

Current liabilities:

           

Accounts payable

  $ —        $ 0.9      $ 65.7      $ 0.2      $ (0.2   $ 66.6   

Accrued liabilities

    —          17.8        13.6        0.2        —          31.6   

Payable to parent

    —          9.6        —          —          —          9.6   

Current portion of long-term debt

    —          —          1.1        —          —          1.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          28.3        80.4        0.4        (0.2     108.9   

Long-term debt, less current portion

    —          332.3        13.1        —          —          345.4   

Deferred income tax liability

    —          59.2        3.3        —          —          62.5   

Intercompany payable (receivable)

    —          331.4        (330.0     45.6        —          47.0   

Other long-term liabilities

    —          18.1        3.6        0.5        —          22.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    —          769.3        (229.6     46.5        (0.2     586.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

           

Stockholder’s equity (deficit):

           

Common stock, $.01 par value, 100 shares authorized, issued and outstanding at December 31, 2010

    —          —          —          —          —          —     

Additional paid-in capital

    127.0        127.0        705.7        23.1        (855.8     127.0   

Retained earnings (accumulated deficit)

    30.7        30.7        212.6        (61.6     (181.7     30.7   

Accumulated other comprehensive income

    0.4        0.4        —          —          (0.4     0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity (deficit)

    158.1        158.1        918.3        (38.5     (1,037.9     158.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

  $ 158.1      $ 927.4      $ 688.7      $ 8.0      $ (1,038.1   $ 744.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

For the Three Months Ended June 30, 2011

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Net sales

  $ —        $ —        $ 507.3      $ 2.0      $ (3.7   $ 505.6   

Operating costs and expenses:

           

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

    —          —          385.5        1.1        (3.7     382.9   

Operating and delivery

    —          0.2        45.5        0.2        —          45.9   

Selling, general and administrative

    —          1.0        26.9        (0.1     —          27.8   

Depreciation and amortization

    —          —          5.6        —          —          5.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          (1.2     43.8        0.8        —          43.4   

Other (income) expense:

           

Interest expense

    —          11.9        —          —          —          11.9   

Intercompany charges

    —          (7.1     6.8        0.3        —          —     

Equity in earnings of subsidiaries

    (20.0     (24.3     —          —          44.3        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    20.0        18.3        37.0        0.5        (44.3     31.5   

Provision (benefit) for income taxes

    —          (1.7     13.2        —          —          11.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 20.0      $ 20.0      $ 23.8      $ 0.5      $ (44.3   $ 20.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Three Months Ended June 30, 2010

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Net sales

  $ —        $ —        $ 332.5      $ 2.5      $ —        $ 335.0   

Operating costs and expenses:

           

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

    —          —          255.3        1.9        —          257.2   

Operating and delivery

    —          0.2        32.6        0.1        —          32.9   

Selling, general and administrative

    —          1.1        18.5        0.2        —          19.8   

Depreciation and amortization

    —          0.3        4.1        —          —          4.4   

Advisory agreement termination charge

    —          3.3        —          —          —          3.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          (4.9     22.0        0.3        —          17.4   

Other (income) expense:

           

Interest expense

    —          8.3        —          —          —          8.3   

Intercompany charges

    —          (11.5     11.2        0.3        —          —     

Equity in earnings of subsidiaries

    (5.3     (10.8     —          —          16.1        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    5.3        9.1        10.8        —          (16.1     9.1   

Provision for income taxes

    —          3.8        —          —          —          3.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 5.3      $ 5.3      $ 10.8      $ —        $ (16.1   $ 5.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

For the Six Months Ended June 30, 2011

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Net sales

  $ —        $ —        $ 940.6      $ 3.6      $ (6.3   $ 937.9   

Operating costs and expenses:

           

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

    —          —          716.5        2.4        (6.3     712.6   

Operating and delivery

    —          0.3        86.3        0.4        —          87.0   

Selling, general and administrative

    —          3.0        51.6        —          —          54.6   

Depreciation and amortization

    —          —          10.3        0.1        —          10.4   

Loss on sale of property and equipment

    —          —          0.1        —          —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          (3.3     75.8        0.7        —          73.2   

Other (income) expense:

           

Interest expense

    —          21.6        0.1        —          —          21.7   

Intercompany charges

    —          (14.1     13.6        0.5        —          —     

Equity in earnings of subsidiaries

    (31.9     (39.8     —          —          71.7        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    31.9        29.0        62.1        0.2        (71.7     51.5   

Provision (benefit) for income taxes

    —          (2.9     22.5        —          —          19.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 31.9      $ 31.9      $ 39.6      $ 0.2      $ (71.7   $ 31.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Six Months Ended June 30, 2010

  Flag
Intermediate
Holdings
Corp.
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Adjustments
&
Eliminations
    Consolidated  

Net sales

  $ —        $ —        $ 619.0      $ 3.9      $ —        $ 622.9   

Operating costs and expenses:

           

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

    —          —          472.5        3.1        —          475.6   

Operating and delivery

    —          0.4        63.5        0.3        —          64.2   

Selling, general and administrative

    —          2.0        38.5        0.3        —          40.8   

Depreciation and amortization

    —          0.6        8.2        0.2        —          9.0   

Gain on sale of equipment

    —          —          (0.1     —          —          (0.1

Advisory agreement termination charge

    —          3.3        —          —          —          3.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          (6.3     36.4        —          —          30.1   

Other (income) expense:

           

Interest expense

    —          17.8        0.1        —          —          17.9   

Intercompany charges

    —          (23.0     22.5        0.5        —          —     

Equity in earnings of subsidiaries

    (6.7     (13.3     —          —          20.0        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    6.7        12.2        13.8        (0.5     (20.0     12.2   

Provision for income taxes

    —          5.5        —          —          —          5.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 6.7      $ 6.7      $ 13.8      $ (0.5   $ (20.0   $ 6.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

For the Six Months Ended June 30, 2011

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiarires
    Adjustments
&
Eliminations
    Consolidated  

Cash flows from operating activities:

           

Net cash (used in) provided by operating activities

  $ —        $ (46.9   $ (0.6   $ 0.6      $ —        $ (46.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Sales of assets

    —          —          0.1        —          —          0.1   

Purchases of assets

    —          (0.2     (3.5     —          —          (3.7

Acquisition costs, net of cash acquired

    —          —          (88.4     —          —          (88.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (0.2     (91.8     —          —          (92.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Borrowings on credit facility

    —          176.5        —          —          —          176.5   

Repayments on credit facility

    —          (42.4     —          —          —          (42.4

Repayments of long-term debt

    —          —          (0.3     —          —          (0.3

Deferred financing costs

    —          (0.9     —          —          —          (0.9

Net change in intercompany balances

    —          (93.8     94.6        (0.8     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    —          39.4        94.3        (0.8     —          132.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash

    —          (7.7     1.9        (0.2     —          (6.0

Cash, beginning of period

    —          12.5        2.0        0.7        —          15.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

  $ —        $ 4.8      $ 3.9      $ 0.5      $ —        $ 9.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Six Months Ended June 30, 2010

  Flag
Intermediate
Holdings
Corporation
    Metals
USA, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiarires
    Adjustments
&
Eliminations
    Consolidated  

Cash flows from operating activities:

           

Net cash provided by (used in) operating activities

  $ 0.5      $ 16.5      $ (32.0   $ (0.5   $ —        $ (15.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Sale of assets

    —          —          0.2        —          —          0.2   

Purchase of assets

    —          —          (1.4     —          —          (1.4

Acquisition costs, net of cash acquired

    —          —          (19.0     —          —          (19.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          —          (20.2     —          —          (20.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Borrowings on credit facility

    —          49.5        —          —          —          49.5   

Repayments on credit facility

    —          (49.5     —          —          —          (49.5

Net change in intercompany balances

    (0.5     (11.4     52.4        0.5        —          41.0   

Excess tax benefits from stock-based compensation

    —          0.1        —          —          —          0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (0.5     (11.3     52.4        0.5        —          41.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash

    —          5.2        0.2        —          —          5.4   

Cash, beginning of period

    —          4.5        0.6        0.4        —          5.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

  $ —        $ 9.7      $ 0.8      $ 0.4      $ —        $ 10.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See disclosure presented on the inside of the front cover of this Form 10-Q for cautionary information with respect to such forward-looking statements. Readers should refer to “Risk Factors” included in our Annual Report on Form 10-K for risk factors that may affect future performance.

Overview

All references to the “Company,” “we” or “our” include Flag Intermediate, its 100% wholly owned subsidiary Metals USA, and the 100% wholly owned subsidiaries of Metals USA.

We believe that we are a leading provider of value-added processed carbon steel, stainless steel, aluminum and specialty metals, as well as manufactured metal components. For the six months ended June 30, 2011, approximately 96% of our revenue was derived from our metals service center and processing activities, which are segmented into two groups: Flat Rolled and Non-Ferrous Group and Plates and Shapes Group. The remaining portion of our revenue was derived from our Building Products Group, which principally manufactures and sells aluminum products related to the residential remodeling industry. We purchase metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. In most cases, we perform the customized, value-added processing services required to meet the specifications provided by end-users. Our Plates and Shapes Group and Flat Rolled and Non-Ferrous Group customers are in the land and marine transportation, energy, aerospace, defense, electrical and appliance manufacturing, fabrication, furniture, commercial construction, and machinery and equipment industries. Our Building Products Group customers are primarily distributors and contractors engaged in the residential remodeling industry.

Industry Trends

Metals Service Centers

U.S. steel consumption declined dramatically during the 2009 recession. 2009 U.S. steel consumption was less than 70% of 2008 U.S. steel consumption and significantly outpaced GDP declines. Consequently, annual growth in steel demand in 2010 exceeded prior year figures by more than 14% as U.S. industrial production recovered slowly. 2010 domestic steel mill utilization rates averaged approximately 70%. During the first six months of 2011, domestic steel mill utilization rates increased slightly, averaging approximately 74%, and U.S. steel consumption increased approximately 10% as most steel consuming industries continued a modest recovery.

World steel production resumed growth in 2010 following the 2009 global recession. China has continued to dominate global steel production and consumption, accounting for roughly half of the total global steel market. Chinese steel production levels and growth characteristics have created significant demand on iron ore and metallurgical coal which has generally outpaced global supply. As a result, merchant prices for both iron ore and metallurgical coal have persistently trended higher and now trade near historical peaks. We believe this upward price trend will continue.

During the first six months of 2011, steel prices have been relatively stable when compared to the significantly volatile periods of 2008, 2009 and 2010. Given current market conditions, steel prices are predominately influenced by raw material input costs, namely iron ore and metallurgical coal. We believe that in the absence of any unanticipated macro-economic disruptions, no near term catalyst that would materially alter current price trends is visible on the horizon.

Building Products

The downturn in the housing and mortgage markets has caused significant contraction in the home improvement remodeling industry. Research indicates that remodeling activity is pro-cyclical with both new

 

29


Table of Contents

residential construction and the broader economy, but remodeling lags homebuilding by several quarters. The high cyclicality of remodeling activity appears to be driven by discretionary improvements, similar to the products sold by our building products business, which are quite volatile. Improvement spending is expected to be much more cyclical and more sensitive to upturns and downturns in the general economy, whereas maintenance and repair spending is expected to be fairly stable over time.

While the pace of the decline in homeowner remodeling projects appears to be moderating, increased remodeling activity does not seem likely to materialize until further signs of recovery emerge in the broader housing market. Although lower financing costs are reducing the cost of financing home improvement projects, weak home prices and decreased cost recovery for most types of remodeling projects continue to discourage upper-end remodeling improvements.

Product demand for the Company’s Building Products Group may be influenced by numerous factors such as interest rates, general economic conditions, consumer confidence and other factors beyond our control. Declines in existing home sales and improvement remodeling expenditures due to such factors could continue to reduce the segment’s performance.

Results of Operations

The following unaudited consolidated financial information reflects our historical financial statements.

Consolidated Results—Three Months Ended June 30, 2011 Compared to June 30, 2010

 

     2011      %     2010      %  
     (In millions, except percentages)  

Net sales

   $ 505.6         100.0   $ 335.0         100.0

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

     382.9         75.7     257.2         76.8

Operating and delivery

     45.9         9.1     32.9         9.8

Selling, general and administrative

     27.8         5.5     19.8         5.9

Depreciation and amortization

     5.6         1.1     4.4         1.3

Advisory agreement termination charge

     —           —          3.3         1.0
  

 

 

      

 

 

    

Operating income

     43.4         8.6     17.4         5.2

Interest expense

     11.9         2.4     8.3         2.5
  

 

 

      

 

 

    

Income before income taxes

     31.5         6.2     9.1         2.7
  

 

 

      

 

 

    

Net sales. Net sales increased $170.6 million, or 50.9%, from $335.0 million for the three months ended June 30, 2010 to $505.6 million for the three months ended June 30, 2011. The increase was primarily attributable to a 33.3% increase in shipments, in addition to a 16.0% increase in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups. Net sales for our Building Products Group increased $0.9 million, or 3.7%, for the second quarter of 2011 versus the second quarter of 2010. Results for the quarter ended June 30, 2011 include operating results from the Trident acquisition which closed on March 11, 2011. In addition, results for the quarter ended June 30, 2011 include the J. Rubin and ORMS acquisitions which closed on June 28, 2010 and December 31, 2010, respectively. J. Rubin, ORMS and Trident contributed a combined $58.4 million of incremental sales for the quarter ended June 30, 2011. On a same store basis, shipments increased 15.2% and average realized prices increased 18.0% over the same period of 2010. The increase in volumes for our metal service center businesses occurred as a consequence of accelerating demand in the industrial economy in line with cyclical recovery momentum in durable goods, oil and gas, heavy equipment and automotive end markets, while non-residential construction markets continue to lag the general economy. We remain focused on product mix enhancement through inventory management, as well as through acquisitions, as a means to mitigate the effects of uneven demand associated with specific regions and end-use industries and to increase our footprint in markets that are showing increasing demand.

 

30


Table of Contents

Cost of sales. Cost of sales increased $125.7 million, or 48.9%, from $257.2 million for the three months ended June 30, 2010 to $382.9 million for the three months ended June 30, 2011. The increase was primarily attributable to a 33.3% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, in addition to a 14.0% increase in average cost per ton. Cost of sales for our Building Products Group increased $0.9 million, or 5.3%. The J. Rubin, ORMS and Trident acquisitions added a combined $42.3 million of incremental cost of sales for the quarter ended June 30, 2011. On a same store basis, shipments increased 15.2% and average cost per ton increased 16.7% over the same period of 2010. The increase in volumes that contributed to higher cost of sales during the second quarter of 2011 was primarily attributable to an increase in steel demand in certain sectors, as discussed above. Cost of sales as a percentage of net sales decreased from 76.8% for the three months ended June 30, 2010 to 75.7% for the same period of 2011.

Operating and delivery. Operating and delivery expenses increased $13.0 million, or 39.5%, from $32.9 million for the three months ended June 30, 2010 to $45.9 million for the three months ended June 30, 2011. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $5.4 million and higher freight costs of approximately $2.4 million. In addition, J. Rubin, ORMS and Trident added a combined $6.7 million of incremental operating and delivery expenses for the second quarter of 2011. As a percentage of net sales, operating and delivery expenses decreased from 9.8% for the three months ended June 30, 2010 to 9.1% for the three months ended June 30, 2011.

Selling, general and administrative. Selling, general and administrative expenses increased $8.0 million, or 40.4%, from $19.8 million for three months ended June 30, 2010 to $27.8 million for the three months ended June 30, 2011. Higher salaries of approximately $2.7 million in addition to an approximate $2.7 million increase in incentive compensation contributed to the period-over-period increase. J. Rubin, ORMS and Trident added a combined $4.5 million of incremental selling, general and administrative expenses for the second quarter of 2011. As a percentage of net sales, selling, general and administrative expenses decreased from 5.9% for the three months ended June 30, 2010 to 5.5% for the three months ended June 30, 2011.

Depreciation and amortization. Depreciation and amortization expense increased $1.2 million, or 27.3%, from $4.4 million for the three months ended June 30, 2010 to $5.6 million for the three months ended June 30, 2011. The increase is primarily attributable to increases in fixed assets resulting from our growth through acquisitions over the past year and from increased capital spending, as our investments in new equipment have grown in line with higher business activity levels. Net property and equipment as of June 30, 2011 was $240.2 million compared to $184.7 million as of June 30, 2010. As a percentage of net sales, depreciation and amortization expenses decreased from 1.3% for the three months ended June 30, 2010 to 1.1% for the three months ended June 30, 2011.

Operating income. Operating income increased $26.0 million, or 149.4%, from $17.4 million for the three months ended June 30, 2010 to $43.4 million for the three months ended June 30, 2011. The increase was primarily a result of the increase in sales discussed above, in addition to the acquisitions of J. Rubin, ORMS and Trident, which contributed a combined $3.7 million of incremental operating income for the three months ended June 30, 2011. Our sales increased at a rate that exceeded the rate of increase in our operating expenses for the period, as we continue to focus on controlling our operating costs. As a percentage of net sales, operating income increased from 5.2% for the three months ended June 30, 2010 to 8.6% for the three months ended June 30, 2011.

Interest expense. Interest expense increased $3.6 million, or 43.4%, from $8.3 million for the three months ended June 30, 2010 to $11.9 million for the three months ended June 30, 2011. The increase was associated with higher borrowings and a higher average facility rate on the ABL facility. The weighted average outstanding balance on our ABL facility increased from $76.0 million for the three months ended June 30, 2010 to $231.9 million for the three months ended June 30, 2011. Borrowings under the ABL facility were used to fund the Trident and ORMS acquisitions, in addition to higher working capital needs between the two periods.

 

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Table of Contents

Consolidated Results—Six Months Ended June 30, 2011 Compared to June 30, 2010

 

     2011      %     2010     %  
     (In millions, except percentages)  

Net sales

   $ 937.9         100.0   $ 622.9        100.0

Cost of sales (exclusive of operating and delivery, and depreciation and amortization shown below)

     712.6         76.0     475.6        76.4

Operating and delivery

     87.0         9.3     64.2        10.3

Selling, general and administrative

     54.6         5.8     40.8        6.6

Depreciation and amortization

     10.4         1.1     9.0        1.4

Loss (gain) on sale of property and equipment

     0.1         0.0     (0.1     0.0

Advisory agreement termination charge

     —           —          3.3        0.5
  

 

 

      

 

 

   

Operating income

     73.2         7.8     30.1        4.8

Interest expense

     21.7         2.3     17.9        2.9
  

 

 

      

 

 

   

Income before income taxes

     51.5         5.5     12.2        2.0
  

 

 

      

 

 

   

Net sales. Net sales increased $315.0 million, or 50.6%, from $622.9 million for the six months ended June 30, 2010 to $937.9 million for the six months ended June 30, 2011. The increase was primarily attributable to a 40.3% increase in shipments, in addition to a 9.7% increase in average realized prices for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups. Net sales for our Building Products Group increased $0.9 million, or 2.2% for the six months ended June 30, 2011 compared to the same period of 2010. Results for the six months ended June 30, 2011 include operating results from the Trident acquisition from the date of the acquisition closing, which occurred on March 11, 2011. In addition, results for the six months ended June 30, 2011 include the results of operations from the J. Rubin and ORMS acquisitions which closed in June and December of 2010, respectively. Trident, J. Rubin and ORMS contributed a combined $84.4 million of incremental sales for the six months ended June 30, 2011. On a same store basis, shipments increased 23.1% and average realized prices increased 13.3% over the same period of 2010. The increase in volumes for our metal service center businesses is attributable to moderate growth patterns most of our end markets have experienced coming off historical lows in 2009. The gradual economic recovery that has continued through the first six months of 2011 has translated into increased metal consumption as production of machinery, appliances, automobiles and capital goods equipment continues to expand. We continue to experience weaker demand in industries tied to non-residential construction and offshore oil and gas drilling.

According to data from the Metals Service Center Institute, year-to-date actual shipments for the service center industry through June 2011 are up 18.6% over the same period of 2010. At the same time, inventory levels have remained relatively stable through the first six months of 2011, indicating a supply-demand balance that is sufficiently tight given the current economic environment. We believe current price levels are sustainable if producers maintain production commensurate with demand; however there can be no guarantee that such trends will continue.

Cost of sales. Cost of sales increased $237.0 million, or 49.8%, from $475.6 million for the six months ended June 30, 2010 to $712.6 million for the six months ended June 30, 2011. The increase was primarily attributable to a 40.3% increase in shipments for our Flat Rolled and Non-Ferrous and Plates and Shapes Product Groups, in addition to an 8.9% increase in average cost per ton. Cost of sales for our Building Products Group increased $1.3 million, or 4.5%. The Trident, J. Rubin and ORMS acquisitions added a combined $61.3 million of incremental cost of sales for the six months ended June 30, 2011. On a same store basis, shipments increased 23.1% and average cost per ton increased 12.9% over the same period of 2010. The increase in volumes that contributed to higher cost of sales during the first six months of 2011 was primarily attributable to the factors that affected the increase in net sales discussed above. Cost of sales as a percentage of net sales decreased from 76.4% for the six months ended June 30, 2010 to 76.0% for the same period of 2011.

 

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Operating and delivery. Operating and delivery expenses increased $22.8 million, or 35.5%, from $64.2 million for the six months ended June 30, 2010 to $87.0 million for the six months ended June 30, 2011. The increase was a result of higher variable costs associated with increased shipments, most notably higher labor costs of approximately $9.2 million and higher freight costs of approximately $5.0 million. In addition, Trident, J. Rubin and ORMS added a combined $9.9 million of incremental operating and delivery expenses for the first half of 2011. As a percentage of net sales, operating and delivery expenses decreased from 10.3% for the six months ended June 30, 2010 to 9.3% for the six months ended June 30, 2011.

Selling, general and administrative. Selling, general and administrative expenses increased $13.8 million, or 33.8%, from $40.8 million for six months ended June 30, 2010 to $54.6 million for the six months ended June 30, 2011. Higher salaries of approximately $3.9 million in addition to an approximate $3.7 million increase in incentive compensation contributed to the period-over-period increase. Trident, J. Rubin and ORMS added a combined $6.3 million of incremental selling, general and administrative expenses for the first six months of 2011. We also incurred costs of approximately $1.4 million during the first half of 2011 which were primarily attributable to the Trident acquisition, which closed in March 2011. As a percentage of net sales, selling, general and administrative expenses decreased from 6.6% for the six months ended June 30, 2010 to 5.8% for the six months ended June 30, 2011.

Depreciation and amortization. Depreciation and amortization expense increased $1.4 million, or 15.6%, from $9.0 million for the six months ended June 30, 2010 to $10.4 million for the six months ended June 30, 2011. The increase is primarily attributable to increases in fixed assets resulting from our growth through acquisitions over the past year and from increased capital spending, as our investments in new equipment have grown in line with higher business activity levels. Net property and equipment as of June 30, 2011 was $240.2 million compared to $184.7 million as of June 30, 2010. As a percentage of net sales, depreciation and amortization expenses decreased from 1.4% for the six months ended June 30, 2010 to 1.1% for the six months ended June 30, 2011.

Operating income. Operating income increased $43.1 million, or 143.2%, from $30.1 million for the six months ended June 30, 2010 to $73.2 million for the six months ended June 30, 2011. The increase was primarily a result of the increase in sales discussed above, in addition to the recent acquisitions of Trident, J. Rubin and ORMS, which contributed a combined $5.1 million of incremental operating income for the six months ended June 30, 2011. The increase in operating income during the first six months of 2011 was also partially attributable to the absence of a one-time, $3.3 million charge to operating expense for the termination of our advisory agreement with Apollo in connection with Metals USA Holdings’ IPO during the second quarter of 2010. As a percentage of net sales, operating income increased from 4.8% for the six months ended June 30, 2010 to 7.8% for the six months ended June 30, 2011.

Interest expense. Interest expense increased $3.8 million, or 21.2%, from $17.9 million for the six months ended June 30, 2010 to $21.7 million for the six months ended June 30, 2011. The increase was associated with higher borrowings and a higher average facility rate on the ABL facility. The weighted average outstanding balance on our ABL facility increased from $76.0 million for the six months ended June 30, 2010 to $189.3 million for the six months ended June 30, 2011. Borrowings under the ABL facility were used to fund the Trident and ORMS acquisitions, in addition to higher working capital needs between the two periods.

 

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Segment Results—Three Months Ended June 30, 2011 Compared to June 30, 2010

 

     Net
Sales
    Operating
Costs and
Expenses
     Operating
Income
(Loss)
    Capital
Spending
     Tons
Shipped(1)
 
             Direct     Toll  
     (in millions, except tons)  

2011:

  

Plates and Shapes

   $ 206.6      $ 181.5       $ 25.1      $ 0.7         145        7   

Flat Rolled and Non-Ferrous

     277.5        254.4         23.1        0.9         177        35   

Building Products

     25.2        24.0         1.2        0.1         —          —     

Corporate and other

     (3.7     2.3         (6.0     —           (4     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 505.6      $ 462.2       $ 43.4      $ 1.7         318        42   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2010:

              

Plates and Shapes

   $ 136.5      $ 125.1       $ 11.4      $ 0.7         137        9   

Flat Rolled and Non-Ferrous

     177.0        163.8         13.2        0.2         124        2   

Building Products

     24.3        23.7         0.6        —           —          —     

Corporate and other

     (2.8     5.0         (7.8     —           (2     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 335.0      $ 317.6       $ 17.4      $ 0.9         259        11   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Shipments are expressed in thousands of tons and are not an applicable measure for the Building Products Group.

Plates and Shapes. Net sales increased $70.1 million, or 51.4%, from $136.5 million for the three months ended June 30, 2010 to $206.6 million for the three months ended June 30, 2011. The increase was primarily attributable to a 25.5% increase in average realized prices, in addition to a 20.6% increase in shipments for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Product demand for the Plates and Shapes Group is more transactional in nature and is typically associated with industries and end markets that show strength during later stages of economic cycles. While we experienced increased demand from the defense and energy services end markets during the second quarter of 2011, the non-residential construction sector, which has been a key metal consuming end market for us in the past, continued to experience weak demand by historical standards.

Operating costs and expenses increased $56.4 million, or 45.1%, from $125.1 million for the three months ended June 30, 2010 to $181.5 million for the three months ended June 30, 2011. The increase was primarily attributable to a 24.8% increase in average cost per ton, in addition to a 20.6% increase in shipments for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Our Plates and Shapes Group experienced slightly compressed gross margins during the second quarter of 2011, as mill price increases in the early part of 2011 had the effect of increasing the average cost of inventory we sold during the second quarter. Operating costs and expenses as a percentage of net sales decreased from 91.6% for the three months ended June 30, 2010 to 87.9% for the three months ended June 30, 2011.

Operating income increased $13.7 million, or 120.2%, from $11.4 million for the three months ended June 30, 2010 to $25.1 million for the three months ended June 30, 2011. The increase primarily resulted from the increase in net sales discussed above, in addition to lower operating costs and expenses as a percentage of net sales, as we continue to focus on cost control even as business conditions are improving. Operating income as a percentage of net sales increased from 8.4% for the three months ended June 30, 2010 to 12.1% for the three months ended June 30, 2011.

Flat Rolled and Non-Ferrous. Net sales increased $100.5 million, or 56.8%, from $177.0 million for the three months ended June 30, 2010 to $277.5 million for the three months ended June 30, 2011. J. Rubin, ORMS and Trident contributed a combined $58.4 million of incremental sales for the quarter ended June 30, 2011. The

 

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remaining increase was primarily attributable to an 11.6% increase in shipments, in addition to a 10.9% increase in average realized prices for the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Our recent acquisitions caused shipments during the second quarter of 2011 to include a larger proportion of toll processed tonnage than our historical norm. Toll processing describes performing processing services on customer-owned material. Net sales for toll processing equates to the processing service fee charged to the customer. Sales of non-ferrous metals accounted for approximately 40% of the segment’s sales product mix for the second quarter of 2011, compared to approximately 38% for the second quarter of 2010. Our Flat Rolled and Non-Ferrous Group experienced increased demand in the automotive, heating and air conditioning equipment, and aerospace equipment markets during the second quarter of 2011, and we expect these markets to continue to do well during 2011, although there can be no assurance that this will be the case.

Operating costs and expenses increased $90.6 million, or 55.3%, from $163.8 million for the three months ended June 30, 2010 to $254.4 million for the three months ended June 30, 2011. J. Rubin, ORMS and Trident contributed a combined $54.7 million of incremental operating costs and expenses to the segment for the second quarter of 2011. The remaining increase was primarily attributable to an 11.6% increase in shipments, in addition to a 10.2% increase in average cost per ton. Our Flat Rolled and Non-Ferrous Group experienced slightly higher gross margins during the second quarter of 2011, as pricing for our indexed contract business was more favorable versus the early part of 2011. Operating costs and expenses as a percentage of net sales decreased from 92.5% for the three months ended June 30, 2010 to 91.7% for the three months ended June 30, 2011.

Operating income increased by $9.9 million, or 75.0%, from $13.2 million for the three months ended June 30, 2010 to $23.1 million for the three months ended June 30, 2011. The increase was primarily attributable to the increase in volumes, combined with the increase in average realized prices discussed above. Operating income as a percentage of net sales increased from 7.5% for the three months ended June 30, 2010 to 8.3% for the same period of 2011.

Building Products. Net sales increased $0.9 million, or 3.7%, from $24.3 million for the three months ended June 30, 2010 to $25.2 million for the three months ended June 30, 2011. The Building Products segment continues to be affected by lower consumer spending on residential remodeling due to the effects of the economic recession and the resulting depreciation of homes, as well as decreased access to affordable credit for homeowners and residential remodeling contractors. These factors have led to significant contraction in the home improvement remodeling industry.

Operating costs and expenses showed a slight increase of $0.3 million, or 1.3%, from $23.7 million for the three months ended June 30, 2010 to $24.0 million for the three months ended June 30, 2011. Operating costs and expenses as a percentage of net sales decreased from 97.5% for the three months ended June 30, 2010 to 95.2% for the three months ended June 30, 2011.

Operating income increased from $0.6 million for the three months ended June 30, 2010 to $1.2 million for the three months ended June 30, 2011. Results for the second quarter of 2011 include a non-recurring gain of approximately $0.7 million resulting from a settlement with the previous owners of the Dura-Loc (now Allmet) roofing business we acquired in 2006 to cover pre-acquisition warranty claims. Operating income as a percentage of net sales was 4.8% for the quarter ended June 30, 2011 versus 2.5% for the quarter ended June 30, 2010.

Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss decreased $1.8 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 due primarily to the absence of increased consulting and professional fees incurred in 2010 in connection with Metals USA Holdings’ IPO.

 

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Segment Results—Six Months Ended June 30, 2011 Compared to June 30, 2010

 

     Net
Sales
    Operating
Costs and

Expenses
     Operating
Income

(Loss)
    Capital
Spending
     Tons
Shipped(1)
 
             Direct     Toll  
     (in millions, except tons)  

2011:

  

Plates and Shapes

   $ 396.8      $ 349.7       $ 47.1      $ 2.3         296        19   

Flat Rolled and Non-Ferrous

     506.0        465.8         40.2        1.1         351        68   

Building Products

     41.4        42.0         (0.6     0.1         —          —     

Corporate and other

     (6.3     7.2         (13.5     0.2         (6     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 937.9      $ 864.7       $ 73.2      $ 3.7         641        87   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

2010:

              

Plates and Shapes

   $ 258.4      $ 237.9       $ 20.5      $ 1.1         238        5   

Flat Rolled and Non-Ferrous

     329.0        304.9         24.1        0.3         264        16   

Building Products

     40.5        41.6         (1.1     —           —          —     

Corporate and other

     (5.0     8.4         (13.4     —           (4     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 622.9      $ 592.8       $ 30.1      $ 1.4         498        21   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Shipments are expressed in thousands of tons and are not an applicable measure for the Building Products Group.

Plates and Shapes. Net sales increased $138.4 million, or 53.6%, from $258.4 million for the six months ended June 30, 2010 to $396.8 million for the six months ended June 30, 2011. The increase was primarily attributable to a 29.6% increase in shipments, in addition to a 18.5% increase in average realized prices for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Product demand for the Plates and Shapes Group is more transactional in nature and is typically associated with industries and end markets that show strength during later stages of economic cycles. Although we experienced an increase in demand for structural steel during the first half of 2011, our strong shipment volumes for the period were also partially attributable to certain customers purchasing inventory to stay ahead of announced price increases and the expectation of a normal seasonal recovery. We experienced increased demand from the defense and energy services end markets during the first six months of 2011. The non-residential construction sector, which has been a key metal consuming end market for us in the past, continued to experience weak demand by historical standards.

Operating costs and expenses increased $111.8 million, or 47.0%, from $237.9 million for the six months ended June 30, 2010 to $349.7 million for the six months ended June 30, 2011. The increase was primarily attributable to a 29.6% increase in shipments, in addition to a 18.5% increase in the average cost per ton for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. We incurred approximately $0.6 million of facility closure and severance expenses related to the closure of a Plates and Shapes location in Hayward, California during the first quarter of 2011, which contributed to the increase in operating costs and expenses versus the prior year. Operating costs and expenses as a percentage of net sales decreased from 92.1% for the six months ended June 30, 2010 to 88.1% for the six months ended June 30, 2011.

Operating income increased by $26.6 million, or 129.8%, from $20.5 million for the six months ended June 30, 2010 to $47.1 million for the six months ended June 30, 2011. The increase primarily resulted from the increase in net sales discussed above, in addition to lower operating costs and expenses as a percentage of net sales, as we continue to focus on cost control. Operating income as a percentage of net sales increased from 7.9% for the six months ended June 30, 2010 to 11.9% for the six months ended June 30, 2011.

 

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Flat Rolled and Non-Ferrous. Net sales increased $177.0 million, or 53.8%, from $329.0 million for the six months ended June 30, 2010 to $506.0 million for the six months ended June 30, 2011. Trident, J. Rubin and ORMS contributed a combined $84.4 million of incremental sales for the six months ended June 30, 2011. The remaining increase was primarily attributable to a 17.9% increase in shipments, in addition to an 8.8% increase in average realized prices for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Our recent acquisitions caused shipments during the first half of 2011 to include a larger proportion of toll processed tonnage than our historical norm. Toll processing describes performing processing services on customer-owned material. Net sales for toll processing equates to the processing service fee charged to the customer. Sales of non-ferrous metals accounted for approximately 38% of the segment’s sales product mix for the first half of 2011, compared to approximately 39% for the first half of 2010. Our Flat Rolled and Non-Ferrous Group experienced increased demand in the automotive, heating and air conditioning equipment, lawn and garden equipment and aerospace equipment markets during the first half of 2011, and we expect these markets to continue to do well during 2011, although there can be no assurance that this will be the case.

Operating costs and expenses increased $160.9 million, or 52.8%, from $304.9 million for the six months ended June 30, 2010 to $465.8 million for the six months ended June 30, 2011. Trident, J. Rubin and ORMS contributed a combined $79.3 million of incremental operating costs and expenses to the segment for the first half of 2011. The remaining increase was primarily attributable to a 17.9% increase in shipments, in addition to a 9.0% increase in average cost per ton. Operating costs and expenses as a percentage of net sales decreased from 92.7% for the six months ended June 30, 2010 to 92.1% for the six months ended June 30, 2011.

Operating income increased by $16.1 million, or 66.8%, from $24.1 million for the six months ended June 30, 2010 to $40.2 million for the six months ended June 30, 2011. The increase was primarily attributable to the increase in volumes, combined with the increase in average realized prices discussed above. Operating income as a percentage of net sales increased from 7.3% for the six months ended June 30, 2010 to 7.9% for the same period of 2011.

Building Products. Net sales increased $0.9 million, or 2.2%, from $40.5 million for the six months ended June 30, 2010 to $41.4 million for the six months ended June 30, 2011. The Building Products segment continues to be affected by lower consumer spending on residential remodeling due to the effects of the economic recession and the resulting depreciation of homes, as well as decreased access to affordable credit for homeowners and residential remodeling contractors. These factors have led to significant contraction in the home improvement remodeling industry.

Operating costs and expenses showed a slight increase of $0.4 million, or 1.0%, from $41.6 million for the six months ended June 30, 2010 to $42.0 million for the six months ended June 30, 2011. Operating costs and expenses as a percentage of net sales decreased from 102.7% for the six months ended June 30, 2010 to 101.4% for the six months ended June 30, 2011.

Operating loss decreased from $1.1 million for the six months ended June 30, 2010 to $0.6 million for the six months ended June 30, 2011. Results for the first half of 2011 include a non-recurring gain of approximately $0.7 million resulting from a settlement with the previous owners of the Dura-Loc (now Allmet) roofing business we acquired in 2006 to cover pre-acquisition warranty claims. Operating loss as a percentage of net sales was 1.4% for the six months ended June 30, 2011 versus 2.7% for the six months ended June 30, 2010.

Corporate and other. This category reflects certain administrative costs and expenses management has not allocated to its industry segments. These costs include compensation for executive officers, insurance, professional fees for audit, tax and legal services and data processing expenses. The negative net sales amount represents the elimination of intercompany sales. The operating loss increased $0.1 million for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 due primarily to higher accruals for incentive compensation.

 

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Liquidity and Capital Resources

Our primary sources of short-term liquidity are borrowings under the ABL facility and our cash flow from operations. We believe these resources will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.

Our borrowing availability fluctuates daily with changes in eligible accounts receivables and inventory, less outstanding borrowings and letters of credit. See “—Financing Activities” below. As of June 30, 2011, we had $426.6 million of eligible collateral, $240.1 million in outstanding advances, $23.0 million in open letters of credit and $163.5 million of additional borrowing capacity. As of June 30, 2011, we had $9.2 million of cash.

We generally meet long-term liquidity requirements, the repayment of debt and investment funding needs, through additional borrowings under the ABL facility and the issuance of debt securities. As of June 30, 2011, our debt consisted of $240.1 million of outstanding borrowings under the ABL facility, $226.3 million principal amount of the Metals USA Notes, IRBs with $13.4 million principal amount outstanding, a note payable to Metals USA Holdings in the amount of $47.0 million, and $2.3 million of capital leases and other obligations. We believe that cash flow from operations, supplemented by cash available under the ABL facility, will be sufficient to enable us to meet our debt service and operational obligations as they come due for at least the next twelve months.

With respect to long-term liquidity, we believe that we will be able to meet our working capital, capital expenditures and debt service obligations. Our ability to meet long-term liquidity requirements is subject to obtaining additional debt and/or equity financing. Decisions by lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit agreements, industry and market trends, the availability of capital, and the relative attractiveness of alternative lending or investment opportunities.

Operating and Investing Activities

Although we do not produce any metal, our financial performance is affected by changes in metal prices. When metal prices rise, the prices at which we are able to sell our products generally increase over their historical costs; accordingly, our working capital (which consists primarily of accounts receivable and inventory) tends to increase in a rising price environment. Conversely, when metal prices fall, our working capital tends to decrease. Our working capital (current assets less current liabilities) increased from $368.2 million at December 31, 2010 to $475.3 million at June 30, 2011.

Changes in metal prices also affect our liquidity because of the time difference between our payment for our raw materials and our collection of cash from our customers. We sell our products and typically collect our accounts receivable within 45 days after the sale; however, we tend to pay for replacement materials (which are more expensive when metal prices are rising) over a much shorter period, primarily to benefit from early-payment discounts that are substantially higher than our cost of incremental debt. As a result, when metal prices are rising, we tend to draw more on the ABL facility to cover the cash flow cycle from material purchase to cash collection. When metal prices fall, we can replace our inventory at lower cost and, thus, generally do not need to access the ABL facility as much to cover the cash flow cycle. We believe our cash flow from operations, supplemented with the cash available under the ABL facility, will provide sufficient liquidity to meet the challenges and obligations we face during the current metal price environment. Additionally, we intend to look for value-added businesses that we can acquire at reasonable prices. We intend to use cash flows from operations and excess cash available under the ABL facility to fund future acquisitions.

The following discussion of the principal sources and uses of cash should be read in conjunction with our condensed consolidated statements of cash flows included in our condensed consolidated financial statements for the six months ended June 30, 2011.

 

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During the six months ended June 30, 2011, net cash used in operating activities was $46.9 million. During the first six months of 2011, our working capital increased as we experienced an environment of increasing prices and end-market demand. Increases of $67.5 million in our accounts receivable balance and $47.1 million in our inventory value were the primary contributors to operating cash outflows for the period. Accounts receivable increased due to stronger sales which were primarily driven by sharply higher shipments versus the same quarter of the prior year. During the six months ended June 30, 2010, net cash used in operating activities was $15.5 million. During the first six months of 2010, our working capital increased as we experienced an environment of modestly increasing prices and slowly recovering end-market demand. Increases of $30.0 million in our accounts receivable balance and $36.7 million in our inventory value were the primary contributors to operating cash outflows for the period.

Net cash used in investing activities was $92.0 million for the six months ended June 30, 2011, and consisted primarily of $88.4 million of acquisition costs, net of cash acquired, for the Trident acquisition, which closed on March 11, 2011, and capital expenditures of $3.7 million. Net cash used in investing activities was $20.2 million for the six months ended June 30, 2010, and consisted primarily of capital expenditures of $1.4 million and $19.0 million of cash paid for the J. Rubin acquisition, which closed on June 28, 2010.

Net cash provided by financing activities was $132.9 million for the six months ended June 30, 2011, which consisted of net borrowings on the ABL facility of $134.1 million offset by $0.9 million of deferred financing costs and $0.3 million of debt repayments. Net cash provided by financing activities was $41.1 million for the six months ended June 30, 2010, and consisted primarily of net borrowings on the intercompany loan facility of $41.0 million.

Covenant Compliance

Adjusted EBITDA

Adjusted EBITDA (as defined by the loan and security agreement governing the ABL facility and the Indenture governing the Metals USA Notes) is defined as EBITDA further adjusted to exclude certain non-cash and non-recurring items. Adjusted EBITDA is not a defined term under GAAP and should not be used as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity.

Fixed Charge Coverage Ratio

Under the ABL facility, the FCCR is determined on a rolling four-quarter period, often referred to as a last-twelve month period, by dividing (1) the Adjusted EBITDA of Metals USA minus income taxes paid in cash minus non-financed capital expenditures by (2) the sum of certain distributions paid in cash, cash interest expense and scheduled principal reductions on debt paid by Metals USA. Should borrowing availability under the ABL facility fall below Minimum Availability, we must maintain a FCCR of at least 1.0 to 1.0, measured on a trailing four-quarter basis. As of June 30, 2011, our borrowing availability under the ABL facility was $163.5 million. In addition, the FCCR also is an important measure of our liquidity and affects our ability to take certain actions, including paying dividends to stockholders and making acquisitions.

Because access to debt capital is currently and in the future will continue to be important to us, we believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with the covenants in our debt agreements. Failure to comply with the FCCR covenant of the ABL facility can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions. As of June 30, 2011, our FCCR was 2.73. As of June 30, 2011, we had $163.5 million of additional borrowing capacity under the ABL facility.

Although the Indenture governing the Metals USA Notes also contains covenants that restrict our ability to incur indebtedness and pay dividends based on our FCCR, the definition and application of the FCCR contained in the Indenture differs from the definition and application of the FCCR in the ABL facility in that the numerator

 

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of the FCCR as defined in the Indenture does not include cash income taxes or non-financed capital expenditures and the denominator of the FCCR as defined in the Indenture does not include the sum of certain distributions paid in cash and scheduled principal reductions on debt, and separate FCCRs are required under certain circumstances. See “—Financing Activities” below.

The Indenture governing the Metals USA Notes contains covenants that restrict our ability to take certain actions, such as incurring additional debt and making certain acquisitions, if we are unable to meet defined Adjusted EBITDA to fixed charge coverage ratios (as defined). The covenants in the Indenture require us to have an Adjusted EBITDA to fixed charge coverage ratio (measured on a trailing four-quarter basis and calculated differently from the fixed charge coverage ratio as defined by the ABL facility) of 2.0 to 1.0 to incur “ratio” indebtedness. Based on the calculations for the trailing four quarters, we are able to satisfy these covenants and incur additional indebtedness under these ratios, including for acquisition purposes, under our Indenture.

Pro Forma Adjusted EBITDA

Pro Forma Adjusted EBITDA is defined as Adjusted EBITDA (as discussed above) with additions for the Adjusted EBITDA of recent acquisitions as though we owned those businesses for the twelve-month period ended June 30, 2011. Adjusted EBITDA on a Pro Forma Basis, as defined in our credit agreements, is a non-GAAP measure used in the calculation of our Consolidated Total Debt Ratio, as defined by the Indenture governing the Metals USA Notes. As of June 30, 2011, our Consolidated Total Debt Ratio was 3.88 based on a trailing twelve-month Pro Forma Adjusted EBITDA of $136.2 million.

Our inability to satisfy the terms of the negative covenants in our debt agreements do not, by themselves, constitute covenant violations or events of default. Rather, they are event-related restrictions that may limit or prohibit the Company from taking certain corporate actions. As of June 30, 2011, we were not restricted under any of the negative covenants in our debt agreements.

Limitations of Adjusted EBITDA

There are material limitations associated with making the adjustments to our earnings to calculate Adjusted EBITDA and using such a non-GAAP financial measure as compared to the most directly comparable GAAP financial measures. For instance, Adjusted EBITDA does not include:

 

   

interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;

 

   

income tax expense, and because the payment of taxes is part of our operations, income tax expense is a necessary element of our costs and ability to operate; and

 

   

depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue.

In addition, fixed charges should not be considered an alternative to interest expense.

 

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Below is a reconciliation of net income to EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, and net cash used in operating activities:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
    Twelve Months Ended
June  30,
 
     2011     2010     2011     2010     2011  

Net income

   $ 20.0      $ 5.3      $ 31.9      $ 6.7      $ 40.1   

Depreciation and amortization(1)

     6.1        4.9        11.4        10.0        21.2   

Interest expense

     11.9        8.3        21.7        17.9        41.0   

Provision for income taxes

     11.5        3.8        19.6        5.5        22.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     49.5        22.3        84.6        40.1        124.6   

Covenant defined adjustments:

          

Facilities closure and severance costs(2)

     —          —          0.6        —          0.6   

Stock options and grant expense(3)

     0.4        0.1        0.8        0.2        1.8   

Advisory agreement fees(4)

     —          3.3        —          3.6        0.2   

Acquisition expenses(5)

     0.2        —          1.4        —          1.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(6)

     50.1        25.7        87.4        43.9        128.6   

Pro forma acquisition adjustments(7)

     —          —          —          —          7.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Adjusted EBITDA(8)

     50.1        25.7        87.4        43.9        136.2   

Loss (gain) on sale of property and equipment

     —          —          0.1        (0.1     0.5   

Provision for bad debts

     0.9        0.5        1.6        1.1        2.9   

Amortization of debt issuance costs

     0.7        0.8        1.4        1.7        3.7   

Deferred income taxes

     5.3        0.8        8.7