S-1/A 1 d592991ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on September 7, 2018

Registration No. 333-226901

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Zekelman Industries, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3317   20-4467287

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

Michael P. McNamara

Executive Vice President and General Counsel

Zekelman Industries, Inc.

227 West Monroe Street, Suite 2600

Chicago, Illinois 60606

(312) 275-1600

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

John M. Gherlein

John J. Harrington

Baker & Hostetler LLP

127 Public Square, Suite 2000

Cleveland, Ohio 44114-1214

(216) 621-0200

 

Patrick H. Shannon

Latham & Watkins LLP

555 Eleventh Street, NW, Suite 1000

Washington, D.C. 20004-1304

(202) 637-2200

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date hereof.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer     (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period with any new or revised accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

 


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CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Securities

to Be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

per Share

 

Proposed

Maximum
Aggregate

Offering Price(2)

  Amount of
Registration Fee(3)

Class A Subordinate Voting Stock, $0.01 par value per share

  48,012,500   $19.00   $912,237,500   $113,574

 

 

(1)

Includes shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)

Of this amount, $12,450 has previously been paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject To Completion. Dated September 7, 2018.

 

 

 

41,750,000 Shares

 

LOGO

Zekelman Industries, Inc.

Class A Subordinate Voting Stock

 

 

This is an initial public offering of shares of the Class A subordinate voting stock of Zekelman Industries, Inc.

Zekelman Industries, Inc. is offering to sell 27,750,000 shares of Class A subordinate voting stock in this offering. The selling stockholders identified in this prospectus are offering to sell an additional 14,000,000 shares of Class A subordinate voting stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

In addition to shares of Class A subordinate voting stock, we will have shares of Class B multiple voting stock outstanding following this offering. Shares of our Class A subordinate voting stock and Class B multiple voting stock are identical, except with respect to voting and conversion. Each share of Class A subordinate voting stock is entitled to one vote per share, and each share of Class B multiple voting stock is entitled to ten votes per share and is convertible into one share of Class A subordinate voting stock in the circumstances described in this prospectus. In addition, we will have a class of Special Voting Shares that will be issued to the holders of Exchangeable Shares in one of our subsidiaries, and the number of Special Voting Shares issued and outstanding in our capital stock at any given time will always correspond on a one-for-one basis with the number of Exchangeable Shares issued and outstanding in such subsidiary. Together, the Special Voting Shares and the Exchangeable Shares are intended to be the voting and economic equivalent of shares of Class B multiple voting stock. See “Description of Capital Stock—Special Voting Shares and Exchangeable Shares.”

Following this offering, the outstanding shares of Class B multiple voting stock and Special Voting Shares will represent approximately 97% of the voting power of our outstanding capital stock and will be beneficially owned by members of the Zekelman family. As a result, we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange (“NYSE”).

Prior to this offering, there has been no public market for the Class A subordinate voting stock. It is currently estimated that the initial public offering price per share will be between $17.00 and $19.00. We have applied to have our Class A subordinate voting stock listed on the NYSE and on the Toronto Stock Exchange under the symbol “ZEK”. Listing is subject to the approval of the NYSE and the Toronto Stock Exchange in accordance with their respective original listing requirements. Neither the NYSE nor the Toronto Stock Exchange has conditionally approved our listing application and there is no assurance that either or both of the NYSE or the Toronto Stock Exchange will approve our listing application.

 

 

See “Risk Factors” beginning on page 29 to read about factors you should consider before buying shares of our Class A subordinate voting stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per share      Total  

Initial public offering price

   $                    $                

Underwriting discounts(1)

   $        $    

Proceeds, before expenses, to Zekelman Industries, Inc.

   $        $    

Proceeds, before expenses, to Selling Stockholders

   $        $    

 

(1)

See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than 41,750,000 shares of Class A subordinate voting stock, the underwriters have the option to purchase up to an additional 6,262,500 shares from certain selling stockholders at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York, on or about                , 2018.

 

Goldman Sachs & Co. LLC       BofA Merrill Lynch
BMO Capital Markets       Credit Suisse
GMP Securities    KeyBanc Capital Markets    William Blair
Stifel    BTIG    PNC Capital Markets LLC

 

 

Prospectus dated                    , 2018.


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LOGO

MANUFACTURING A STRONGER FUTURE

We believe in the strength of steel and domestic manufacturing. The entrepreneurial

spirit empowers our teams to innovate, improving the way leading organizations

build structures, make equipment and manage processes.

TOGETHER, OUR PRODUCTS SUPPORT, STRENGTHEN AND PROTECT

THE PLACES WHERE PEOPLE LIVE, WORK, TRAVEL AND PLAY.

 

 

 

LOGO


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TABLE OF CONTENTS

Prospectus

 

Prospectus Summary

     1  

Risk Factors

     29  

Special Note Regarding Forward-Looking Statements

     51  

Use of Proceeds

     53  

Dividend Policy

     54  

Capitalization

     55  

Dilution

     57  

Selected Historical Consolidated Financial and Other Data

     59  

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

     63  

Business

     90  

Management

     114  

Executive Compensation

     121  

Certain Relationships and Related Party Transactions

     135  

Principal and Selling Stockholders

     138  

Description of Capital Stock

     140  

Shares Eligible for Future Sale

     149  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Class A Subordinate Voting Stock

     152  

Underwriting

     157  

Legal Matters

     163  

Experts

     163  

Where You Can Find Additional Information

     163  

Index to Consolidated Financial Statements

     F-1  

Through and including                , 2018 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our Class A subordinate voting stock.

For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States and Canada. Persons outside the United States or Canada who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A subordinate voting stock and the distribution of this prospectus outside the United States or Canada.

 

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Market and Industry Data

This prospectus contains estimates and information concerning our industry and market position that are based on industry publications and reports, management’s knowledge and experience in the markets in which our business operates, internal research and information obtained from customers, suppliers, trade and business organizations. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in industry publications and reports. The markets in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

With respect to our estimates of United States and Canada market share as a producer of specified product categories, we note the following:

 

   

standard pipe production share estimates include standard, fence and sprinkler pipe products to conform to the methodology of certain industry sources, but exclude galvanized continuous welded (“CW”) pipe sold for value-added processing and distribution into electrical conduit end markets; and

 

   

electrical conduit production share estimates include the aforementioned galvanized CW pipe.

References to industrial steel pipe and tube products exclude seamless pipe and tube products and oil country tubular goods (“OCTG”).

Corporate Information, Trademarks and Tradenames

This prospectus contains registered and unregistered trademarks and service marks of Zekelman Industries, Inc. and its affiliates, as well as trademarks and service marks of third parties. Solely for convenience, these trademarks and service marks are referenced without the ®, or similar symbols, but such references are not intended to indicate, in any way, that we or our affiliates will not assert, to the fullest extent under applicable law, our or their rights to these trademarks and service marks. All brand names, trademarks and service marks appearing in this prospectus are the property of their respective holders.

Basis of Presentation

In this prospectus, unless we indicate otherwise or the context requires, “we,” “us,” “our,” “Zekelman Industries” and the “Company” refer to Zekelman Industries, Inc. and its consolidated subsidiaries.

Our fiscal year is a 52 or 53 week period ending on the last Saturday in September. Our fiscal year 2017 ended September 30, 2017 and consisted of 53 weeks. Our fiscal year 2016 ended September 24, 2016 and consisted of 52 weeks. Our fiscal year 2015 ended September 26, 2015 and consisted of 52 weeks. References in this prospectus to each of these fiscal years refer to the applicable 53 week or 52 week period. Unless otherwise noted, references to a year refer to a calendar year.

References herein to the “LTM Period” refer to the 53 weeks ended June 30, 2018. See “Prospectus Summary—Summary Consolidated Financial and Other Data.”

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

 

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Non-GAAP Financial Measures

In this prospectus, we present EBITDA and Adjusted EBITDA, as well as other operating measures derived from Adjusted EBITDA. These are supplemental measures that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as alternatives to operating income, income from continuing operations, net income (loss) or any other performance measure derived in accordance with GAAP or as an alternative to cash flows provided by operating activities as a measure of our liquidity.

We define EBITDA as income from continuing operations plus net interest expense, provision (benefit) for income taxes, depreciation and amortization of intangibles. We define Adjusted EBITDA as EBITDA adjusted for certain items that are non-recurring, non-cash and/or transaction-related expenses or that otherwise may vary from period to period in a way that we believe may not correlate with or be indicative of core operating performance in a particular period. See “Prospectus Summary—Summary Consolidated Financial and Other Data—Non-GAAP Reconciliation” for more information regarding the items for which we have made adjustments.

In general, we believe EBITDA and Adjusted EBITDA are useful indicators of our operating performance for the following reasons:

 

   

EBITDA and Adjusted EBITDA are widely used by investors to measure a company’s operating performance without regard to items, such as interest expense, provision for income taxes and depreciation and amortization, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired;

 

   

Securities analysts and ratings agencies may also use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the performance of our business; and

 

   

Our management uses Adjusted EBITDA for certain planning and budgeting purposes, for assessing compliance with covenants in our debt agreements (although the calculations under our debt agreements may differ from those presented herein), and for determining a portion of the compensation of our executive officers.

EBITDA and Adjusted EBITDA, however, do not represent and should not be considered alternatives to operating income, income from continuing operations, net income (loss), cash provided by operating activities or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similar measures reported by other companies because other companies may not calculate Adjusted EBITDA in the same manner as we do. Although we use Adjusted EBITDA for the purposes described above, it has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include net interest expense, which has been a necessary element of our costs. Because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue. In addition, the omission of amortization expense associated with our finite-lived intangible assets further limits its usefulness. Adjusted EBITDA also does not include the expense recognition of certain income taxes, which is a necessary element of our operations. Because Adjusted EBITDA does not account for certain expenses, management does not view it in isolation or as a primary performance measure. Rather, it is viewed together with GAAP measures, such as operating income, income from continuing operations, net income (loss) and net sales, to measure operating performance.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before deciding to invest in our Class A subordinate voting stock. You should read this entire prospectus carefully, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.

Company Overview

We are a leading North American manufacturer of industrial steel pipe and tube products with over 100 years of operating experience. We believe we are the largest producer by volume of Hollow Structural Sections (“HSS” or “structural tubing”) and electrical conduit products in the United States and Canada on a combined basis, and the largest producer by volume of standard pipe products in the United States. We are headquartered in Chicago, Illinois and have 13 pipe and tube production facilities in seven U.S. states and one Canadian province, with total production of approximately 2.1 million tons from our continuing operations for the LTM Period. We offer a broad array of products marketed under a family of respected brands such as Atlas, Wheatland, Sharon Tube, Western Tube & Conduit, Picoma and Z Modular. For the LTM Period, we sold over 10,000 distinct pipe and tube products to over 2,000 customers. We manufacture our products using a variety of raw materials, the most significant of which is Hot Rolled Coil (“HRC”). We believe we are the largest consumer of HRC by volume in the United States and Canada.

The majority of our products are used in infrastructure and non-residential construction applications. We also supply products for use in the fabrication, automotive, oil and gas, agricultural and industrial equipment and retail end markets. We manufacture many of our products to operate under specialized conditions, including in load-bearing, high-pressure, corrosive and high-temperature environments.

We generate revenue primarily in the United States, which accounted for approximately 86% of our net sales for the LTM Period, with the remainder generated primarily in Canada. For the LTM Period, we generated $2.6 billion of net sales, $249.2 million of income from continuing operations and $492.5 million of Adjusted EBITDA.

Since 2006, we have completed six strategic acquisitions, including most recently the acquisitions of Western Tube & Conduit Corporation (“Western Tube”) and the operating assets and certain liabilities of American Tube Manufacturing, Inc. (“American Tube”) in February 2017. Our acquisitions have enabled us to scale our business by offering a more comprehensive range of industrial steel pipe and tube products and broadened our geographic footprint. Following each acquisition, we have successfully integrated acquired product lines, rationalized manufacturing facilities, reduced costs and improved quality control, as well as reduced working capital by applying just-in-time inventory management and leveraging our skilled manufacturing and supply chain management processes across the acquired facilities. These six acquisitions also substantially increased our manufacturing scale and consolidated our raw material consumption, which has allowed us to obtain more favorable terms with suppliers.

We intend to continue to expand our leading market positions and scale through a variety of growth initiatives, and to respond to and capitalize on strong demand for our products. We have identified a number of projects to both optimize existing production capacity by increasing utilization across our portfolio of pipe and tube manufacturing facilities, and build new capacity at our existing locations. We also believe that our industry leading scale and advantaged geographic footprint, together with our sophisticated logistics and information sharing systems and manufacturing facilities’



 

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production flexibility, uniquely position us to optimize our capacity by rapidly responding to improving market conditions. In addition to these pipe and tube growth initiatives, we are in the process of developing a new product line, called Z Modular, and we also maintain and monitor a pipeline of potential acquisition targets.

Our Product Offerings

We offer a comprehensive range of products to provide the benefits of a “one-stop shop” to over 2,000 steel pipe and tube customers. We manufacture products with value-added features, such as galvanizing, color coating, bending, threading and coupling. We also provide customized product solutions and we believe we are the only North American manufacturer of certain products such as CW pipe products and 14”-16” square and rectangular-shaped structural tubing. We believe that our broad product offerings differentiate us and benefit our customers by allowing them to consolidate their purchases across product lines, manage inventory more efficiently and reduce lead times.

We have three reportable segments: Atlas (structural tubing), Electrical, Fence and Mechanical or “EFM” (electrical conduit, fittings and couplings, fence pipe and mechanical tubing), and Pipe (standard pipe and fire sprinkler pipe). In addition to these three reportable segments, our consolidated financial results include an “All Other” category which includes our drawn over mandrel (“DOM”) tubing and energy tubular product lines, our Z Modular business and other non-core activities that are not material enough to require separate disclosure, as well as unallocated corporate costs.

We sell structural tubing under the Atlas brand. We sell electrical conduit, fence pipe and mechanical tubing under the Wheatland and Western Tube & Conduit brands, and fittings and couplings under the Picoma and Wheatland brands. We sell standard pipe, fire sprinkler pipe and energy tubulars under the Wheatland brand. We sell DOM tubing under the Sharon Tube brand.



 

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Reportable Segment

 

Brand(s)

  Percent of
net sales
(LTM Period)
 

Selected Key
Products

 

Application / Uses

Atlas   Atlas   49%  

•   Structural tubing/HSS

 

•   Broad range of construction and architectural applications, including pilings

 

•   Structural component for vehicles

 

•   Agricultural and industrial equipment

 

•   Highway guardrails, signage and other structures

 

 

 

 

 

 

 

 

 

EFM   Wheatland / Western Tube & Conduit, Picoma   27%  

•   Electrical conduit

 

•   Encasement of electrical wires in residential, commercial and industrial construction applications

 

•   Fittings and couplings

 

•   Connectors for electrical conduit products

 

•   Fence pipe

 

•   Residential, industrial, commercial, military and high security applications to support the wire body of a fence

 

•   Mechanical tubing

 

•   Construction and assembly of a wide range of applications such as playground equipment, solar panel support systems and greenhouse framing

 

 

 

 

 

 

 

 

 

Pipe   Wheatland   15%  

•   Standard pipe

 

•   Primarily plumbing and heating applications for the low-pressure conveyance of water, gas, air, steam and other fluids

 

•   Fire sprinkler pipe

 

•   Fire suppression purposes to transport water to sprinkler heads in non-residential construction sprinkler systems

 

 

 

 

 

 

 

 

 

All Other  

Sharon Tube, Wheatland,

Z Modular

  9%  

•   DOM tubing

 

•   Primarily for fluid power applications such as hydraulic cylinders and hydraulic lines and for certain automotive components

 

•   Energy tubulars

 

•   Primarily used in the oil and gas industry as key components of drilling, exploration and production processes of oil and natural gas and for the transportation of these resources over both short and long distances

 

•   Z Modular

 

•   Z Modular designs, manufactures and installs permanent modular buildings using our patented VectorBloc system of construction for use in hotels, dormitories, and multi-family construction and other permanent applications.

     

•   Other non-core

 


 

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Our Steel Pipe and Tube Manufacturing Facilities and Processes

We operate 13 pipe and tube manufacturing facilities, of which 12 are owned and one is leased. One of these facilities, located in Sharon, Pennsylvania, is currently idled, and may be restarted if market conditions are supportive. Our manufacturing facilities are located in the United States in the Midwest / Great Lakes region, the Southeast, and in California, as well as in Ontario, Canada. The facilities are strategically located in close proximity to our primary steel suppliers and to our customers, which minimizes potential disruption to deliveries of raw materials and allows us to optimize freight costs, lower our inventory levels and reduce lead times for our customers. We believe we employ some of the most advanced technical capabilities in the steel pipe and tube industry, including modern, high-speed, quick change pipe and tube mills.

Steel Pipe and Tube Production Capabilities(1)

 

Location

   LTM
Production
(kt)
     Production
Capacity

(kt)
     Atlas      EFM      Pipe      Other  

Harrow, ON

     500        662                  

Chicago, IL (HSS)

     420        494                

Blytheville, AR

     73        328                  

Plymouth, MI

     174        169                

Birmingham, AL

     104        100                

Wheatland, PA (Council Avenue)

     233        255                  

Chicago, IL (Pipe)

     200        250                    

Warren, OH

     219        230                    

Long Beach, CA

     113        150                

Wheatland, PA (Church Street) / Niles, OH

     68        120                    

Cambridge, OH

     17        17                

Sharon, PA (idled) (Mill Street)

            75                  
  

 

 

    

 

 

             

Total:

     2,121        2,850              
  

 

 

    

 

 

             

 

(1)

Continuing operations only.

Z Modular currently operates a production facility in a leased premises located in Birmingham, Alabama. Additionally, we have purchased a facility in Killeen, Texas where we plan to open our second modular production facility. Operations in Killeen are expected to commence in early calendar year 2019.



 

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Our Steel Pipe and Tube Production Footprint

 

LOGO

 

Note: Excludes facilities in Thomasville, Alabama and Welland, Ontario that are currently idled and held for sale. Also excludes Winnipeg, Manitoba warehouse and Z Modular facilities.

We employ two pipe-milling technologies—electric resistance weld (“ERW”) and CW:

 

   

Electric Resistance Weld.    ERW pipe is cold-formed from flat-rolled strip steel and electrically welded into a tubular shape. Approximately 89% of our continuing operations volume is produced using the ERW process.

 

   

Continuous Weld.    CW pipe is formed from flat-rolled strip steel that has been heated in a natural gas-powered furnace operating at temperatures of up to 2,500 degrees Fahrenheit and welded into a tubular shape with a blast of oxygen. This process creates products that are optimal for bending and threading.

In addition to pipe-milling, we employ a broad array of finishing techniques, including DOM, in-line galvanizing, hot-dip galvanizing, heat treating, threading, roll grooving, coupling and color coating.

Our Steel Pipe and Tube Customers

Our main customers include metal service centers, plumbing distributors, pipe, valve and fitting distributors, electrical wholesalers, retail home improvement centers, large scale construction fabricators, piling contractors, original equipment manufacturers (“OEMs”), rack fabricators, fire sprinkler fabricators, fence supply houses and oil and gas end users as well as distributors.



 

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We have had relationships with many of our customers for more than 20 years. We sell to a broad customer base and are not dependent on any single customer, with our largest customer representing approximately 9% of our total tons sold and 8% of our total net sales for the LTM Period. Our top ten customers represented approximately 31% of our total tons sold and 26% of our total net sales for the LTM Period.

We have developed a proprietary vendor managed inventory program called Automated Inventory Management (“AIM”) for use by our larger metal service center structural tubing customers. This program provides customers with an optimized inventory management solution by giving us direct access to distributor sales and stock levels. This program allows customers to easily replenish product and facilitates repetitive purchase orders minimizing outside bid processes, which we believe allows our customers to minimize inventory levels and accelerate inventory turns. Customer use of the AIM program is highest for our structural tubing business, and we are in the process of rolling this program out to customers of our other product lines as well. We believe our AIM program is an important source of competitive advantage and commercial differentiation, as well as a means of enhancing order flow regularity.

Our Suppliers and Raw Material Input

Our primary raw material input is HRC and we believe we are the largest consumer of HRC by volume in the United States and Canada, accounting for approximately 6% of the total consumption of HRC in the United States on a volume basis. We purchase our HRC from a variety of sources and consolidate purchases among our top suppliers to improve cost and delivery terms. For the LTM Period, our purchases of HRC totaled 2.0 million tons, of which we purchased 69% from domestic producers and the remainder from foreign supply sources, primarily Canadian suppliers. We maintain flexibility to purchase raw materials from a variety of sources based on price, availability and end-user specifications. For example, we maintain active relationships with other suppliers to ensure alternative sources of supply. We have also developed supply programs with certain of our key suppliers that we believe provide us with reduced lead times for steel purchases relative to our competitors. For several years we have also purchased a significant portion of our raw materials from suppliers that are able to certify that their product is “made and melted” in the United States in order to satisfy the requirements of certain end users. We believe our scale is a key competitive advantage, as we are able to leverage our purchasing volume and market insights to obtain more favorable terms from our suppliers and drive procurement savings.

Our Steel Pipe and Tube Industry and Competition

We operate in the industrial steel pipe and tube products industry, which historically has been a highly fragmented industry. Our competitors include Allied Tube & Conduit (Atkore International), Independence Tube (Nucor Corp.), Southland Tube (Nucor Corp.), Republic Conduit (Nucor Corp.), TMK IPSCO (OAO TMK), Bull Moose Tube, EXL Tube, Maruichi Leavitt Pipe & Tube, Searing Industries and many smaller, primarily local family-owned manufacturers. We compete primarily on the basis of price, quality, delivery terms and customer service. In recent years, we and certain of our competitors have been active in acquiring smaller industrial steel pipe and tube products companies within our industry. Certain competitors have also selectively exited certain markets, which has allowed us to increase our share, such as Allied Tube & Conduit (Atkore International) announcing its exit from the fence pipe and fire sprinkler pipe markets in August 2015.

The largest drivers of domestic consumption for steel pipe and tube products are the non-residential construction, infrastructure, OCTG and general industrial markets. Recent improvements in demand for our products suggest that key end markets are continuing to strengthen,



 

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with non-residential construction spend estimated to continue to increase over the next few years as shown in the graph below (left). Additionally, the Architecture Billings Index, a measure of non-residential construction activity, has reflected increased architectural billings for 20 of the past 24 months, as of June 30, 2018, as shown in the graph below (right).

 

Total Non-Residential Put in Place Est. for the United States ($ in billions)(1)   Architecture Billings Index(2)
LOGO   LOGO
Source: United States Census and FMI Forecasts as of Q1 2018   Source: The American Institute of Architects

 

(1)

Includes Construction Put in Place for Non-Residential Buildings and Non-Building Structures.

(2)

Values in excess of 50 indicate reported increase in architecture billing activity by survey participants.

Foreign Competition

Historically, foreign competition has been most significant in the standard pipe and energy tubular markets, with foreign production excluding Canada estimated to represent 45% and 53%, respectively, of volumes of tons sold in the United States for the LTM Period. Because many of our customers’ product applications require domestically manufactured pipe and tube components, and since imported products and our product portfolio in particular, must be shipped long distances via ocean freight at a high cost and at risk of product damage, we believe domestically produced standard pipe and energy tubular products will remain competitive with imported products, independent of certain trade case actions described in greater detail below. More specifically, while we face competition from foreign manufacturers, we believe that recent developments, particularly the implementation of trade sanctions against unfairly traded steel in connection with Section 232 of the Trade Expansion Act of 1962 (“Section 232”), meaningfully enhance our competitive positioning relative to foreign sources of supply. We believe that the implementation of trade relief in connection with Section 232 (and trade deals negotiated in connection therewith) will cause foreign production to account for a lesser share of total volumes sold in the United States for the foreseeable future.

Independent of the implementation of trade sanctions in connection with Section 232, our competitive position relative to imports historically has benefited from the implementation and enforcement of trade cases related specifically to our products, in particular our standard pipe products. For example, over the past several years, there have been trade actions taken by the United States Department and Commerce (“DOC”) and the United States International Trade Commission (“ITC”) with respect to imports that compete with our standard pipe products. In 2012, the ITC implemented duties on CW pipe from eight countries, and in early 2018 the ITC extended these duties for another five years, issuing preliminary margins ranging from approximately 9% to 38%. In addition, in early 2018, the DOC announced the preliminary results of antidumping duty orders on imports of line pipe from South Korea. The preliminary duty rates range from approximately 2% to 19%. Final duty determinations are expected to be implemented by the end of calendar year 2018. If final duty determinations are made by the DOC and the ITC, duties will be in effect for five years, subject to extension for another five years.



 

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Our structural tubing and electrical conduit markets face less competition from imports. For our structural tubing business we believe our quick-rolling cycles, high levels of product availability and custom product qualities enhance our competitive position relative to foreign sources of supply. We estimate that foreign-produced structural tubing products accounted for approximately 7% of the volume of such products sold in the United States and Canada for the LTM Period. For our electrical conduit business we believe imports are limited due primarily to the light wall dimensions of electrical conduit, which leaves the product particularly susceptible to ocean freight damage. Based on estimates from the Committee on Pipe & Tube Imports and from Statistics Canada, during the LTM Period, foreign-produced electrical conduit, primarily from Mexico, accounted for approximately 4% of the volume of such products sold in the Unites States and Canada. In general, our business systems, AIM, and our full offering of product lines allow us to compete against imports by affording customers the ability to experience rapid inventory turnover which in turn minimizes potential price fluctuations and reduces the customers’ working capital needs.

Steel Market Dynamics

The market price of our products is closely related to the price of HRC. The price of benchmark HRC is primarily affected by the demand for steel and the cost of raw materials. Robust global growth, along with steel production capacity rationalization in China and raw material price increases, has caused HRC prices to strengthen since 2016, from $386/ton on January 1, 2016 to $651/ton on January 1, 2018. More recently, trade case actions on the part of the United States government have also impacted HRC prices. On March 1, 2018, President Trump announced that his administration would implement trade actions against unfairly traded steel in connection with Section 232. Since January 1, 2018, HRC prices have increased by $266/ton, to $917/ton as of June 30, 2018.

While the volatility of HRC has resulted in corresponding volatility in the prices of our products, we seek to pass HRC price increases on to our customers. We sell our products on a non-contractual spot basis, which has allowed us to successfully limit our commodity price exposure through our price negotiation, raw material procurement and inventory management program. Although the price of our products closely relates to the price of HRC, there may be a time lag between when changes in prices charged by our suppliers take effect and the point when we can implement corresponding changes in the prices of our products. Our successful track record in managing underlying commodity price exposure is evident in our financial performance over the last several years, during which we have successfully grown Adjusted EBITDA per ton throughout a period of HRC price volatility as evidenced by the chart below.

HRC Price Volatility and Adjusted EBITDA / Ton(1)

 

 

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(1)

See “Non-GAAP Financial Measures” and “Prospectus Summary—Summary Consolidated Financial and Other Data—Non-GAAP Reconciliation” for more information about our use of Adjusted EBITDA and derivative operating measures such as Adjusted EBITDA per ton, as well as a reconciliation to income from continuing operations. In the periods presented in the above table, income from continuing operations was $5.8 million in fiscal year 2015, $85.1 million in fiscal year 2016, $163.3 million in fiscal year 2017 and $249.2 million in the LTM Period.

Underlying HRC price volatility is also mitigated through the counter-cyclical nature of our working capital flows, with increases in working capital when HRC prices rise and releases of working capital when HRC prices fall, resulting in relative stability in net cash provided by operating activities.

HRC Price Volatility and Net Cash provided by Operating Activities

 

 

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Our Competitive Strengths

We believe that the following competitive strengths enhance our market position:

A Leading Steel Pipe and Tube Manufacturer in North America.    We believe we are the largest manufacturer by volume of structural tubing and electrical conduit products in the United States and Canada on a combined basis, and the largest manufacturer by volume of standard pipe products in the United States.

 

     LTM Period     
     Estimated
Share (1)
   Tons (kt) (2)   

Key Competitors

Structural tubing

           29%  

 

 

 

           1,270        

 

 

 

  

Independence Tube (Nucor), Southland Tube (Nucor), Bull Moose Tube, EXL Tube, Maruichi Leavitt Pipe & Tube, Searing Industries

Electrical conduit

           47%      254   

Allied Tube & Conduit

(Atkore International),

    

 

  

 

  

Republic Conduit (Nucor)

Standard pipe

           21%      397    Bull Moose Tube, EXL Tube, TMK IPSCO, foreign producers


 

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Source: National Electrical Manufacturers Association (“NEMA”), Preston Pipe & Tube Report, Metal Service Center Institute (“MSCI”) and management estimates.

 

(1)

For structural tubing and electrical conduit, estimated share is for the United States and Canada on a combined basis. For standard pipe, estimated share is for the United States.

(2)

Represents our shipments in the LTM period.

Advantaged Manufacturing Footprint, with Flexible Production Capabilities.    We believe our network of facilities gives us an advantaged manufacturing footprint in the United States and Canada, with an operating presence in the Midwest / Great Lakes region, the Southeast and the West Coast. Our strategically located facilities are in close proximity to our primary steel suppliers and to our customers in each of our key regions, which minimizes potential disruption to deliveries of raw materials and allows us to realize freight cost savings, while also lowering our inventory levels and reducing lead times and freight costs for our customers. Our network of strategically located facilities also allows us to be more responsive than competitors in leveraging and capitalizing on market and growth opportunities within each of the regions in which we operate. We have solidified our industry advantaged footprint through selective acquisitions, where we believe we have a demonstrated track record of successfully acquiring and integrating businesses, as well as investing organically.

Important Supplier and Solutions Provider to Our Customers, with Commitment to Differentiated Service.    Through our “Make it eZ” approach, we are committed to offering our customers superior product diversity, quality and reliability. As a result, we are able to serve as a “one-stop shop” for many of our customers with numerous customer relationships of over 20 years in length. Our manufacturing and distribution advantages and quick turnaround times from order to shipment create high customer retention rates. Moreover, our product mix, sophisticated logistics, information technology systems and ecommerce solutions, including our proprietary vendor managed inventory program called AIM and our SAP enterprise resource planning system, and specialized manufacturing capabilities allow us to effectively bundle shipments, thereby reducing transportation costs, which we believe results in the shortest lead times to our customers as compared to our competitors. We produce over 10,000 distinct pipe and tube products in a broad range of sizes and shapes and we believe we are the only North American manufacturer of certain products such as CW pipe products and 14”-16” square and rectangular-shaped structural tubing. Consequently, we are a key link in the value chain and an important supplier for the majority of our steel service centers and major distributor customers and the end markets that they serve.

Efficient Operations with Significant Scale and Purchasing Power.    We have total annual production capacity of approximately 2.9 million tons from continuing operations and have continuously invested in equipment, processes and training to increase throughput, yields and efficiencies. Our scale also benefits our procurement of raw materials. As we believe we are the largest consumer of HRC by volume in the United States and Canada, we believe we are able to leverage our scale to drive procurement savings. Our manufacturing scale and raw material consumption also allow us to aggregate purchasing and obtain more favorable terms from our suppliers. Over the past several years, management has implemented cost and production efficiency initiatives, while managing capital expenditures to optimize physical assets. These improvements have allowed us to maintain lean manufacturing processes, which result in lower inventory levels, efficient change-overs and reduced customer lead times, enabling us to more successfully and profitably satisfy growing demand in the end markets related to products we sell.

Low Fixed Cost and Highly Variable Cost Structure.    Our scale and flexible manufacturing base enable us to maintain a highly variable cost structure, with variable costs accounting for 82% of total costs for the LTM Period, of which steel accounts for 61% of total costs. We believe this cost



 

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structure, which is underpinned by our industry leading scale and network of facilities located in close proximity to suppliers and customers, is among the lowest compared to our competitors in the United States and Canada. The following chart illustrates the key components of our highly variable cost structure.

 

 

LOGO

 

(1)

Total Variable Costs include Steel, Freight and Conversion (Variable).

Experienced and Proven Management Team.    Our senior management team has decades of leadership experience in the industrial steel pipe and tube industry and other relevant industrial sectors. We believe our senior management team is supported by a strong executive and operating leadership organization, including our corporate vice presidents and production facility leaders, who are seasoned operators with valuable insight into and deep knowledge of the industrial steel pipe and tube market. Our Executive Chairman and Chief Executive Officer (“CEO”), Barry Zekelman, has served in leadership capacities at Zekelman Industries and its predecessors for over 30 years. Barry Zekelman is supported by a team of operating executives with over 100 cumulative years of steel pipe and tube sector experience, who have managed the business through steel price cycles, shifting macroeconomic climates and different capital structures.

Growth Strategy

We intend to expand our leading market positions and scale through organic and strategic growth initiatives. At present, we have identified a number of projects to both optimize existing production capacity at minimal incremental capital cost, and to modernize and build new capacity at our existing locations to respond to and capitalize on market opportunities.

Our primary focus is to drive growth by optimizing the utilization of our Atlas facilities, and in certain cases, modestly expanding our production capacity, to take advantage of robust growth in demand for structural tubing/HSS. Specifically, we believe that the continued recovery of non-residential construction and infrastructure end-market demand supports our ongoing Atlas production capacity optimization initiatives. Based on data from Dodge Data & Analytics, from 2010 to 2017 starts for non-residential construction and residential buildings with greater than four stories has grown at an average annual rate of approximately 10% in the U.S., and currently totals nearly 1.5 billion square feet



 

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annually. During this same period, consumption of HSS in the U.S. and Canada has grown from 2.5 million tons in 2010 to 3.1 million tons in 2017, and is on pace to total approximately 3.6 million tons in 2018 based on market data from MSCI. Growth in the consumption of HSS has been driven by non-residential construction and infrastructure spend, as well as increased penetration and acceptance of products using HSS relative to competing building products, such as steel rebar and steel l-beam. This penetration is demonstrated in the following chart, which displays both U.S. construction starts and HSS consumption for the U.S. and Canada from 2005 to 2018. Based on data from MSCI, we believe that HSS consumption for 2018 is on pace to surpass its pre-financial crisis demand levels of 3.0 to 3.3 million tons, despite construction starts of 1.5 billion square feet remaining well below the pre-financial crisis levels of nearly 1.9 billion square feet in the 2005 to 2007 period. We believe continued growth in non-residential construction starts supports additional growth in HSS consumption.

United States and Canada HSS Consumption (Mt)

 

LOGO

Source: MSCI, Dodge Data & Analytics

 

(1)

HSS consumption in 2018 based on year to date HSS consumption through July 31, annualized.

Similarly, we believe that specific trends within certain segments of construction are indicative of broader positive market conditions, particularly as it relates to HSS consumption. For example, we believe secular changes in building design and construction, in particular trends toward larger and taller buildings, are also driving HSS demand growth. This shift is underpinned by a number of factors, including re-urbanization trends, the need for larger and taller warehouses to support ecommerce, and large data centers to support enhanced connectivity and data processing and storage needs. We believe that demand for products using HSS will continue to remain strong for the foreseeable future, and we believe our portfolio of highly efficient structural mills, which feature quick change capabilities, are well positioned to capitalize on this market strength through specific optimization initiatives described in further detail below.

As we respond to and capitalize on opportunities in the market as part of our growth strategy, we have primarily focused our investment in optimizing, modernizing and building new capacity in our Atlas structural tube facilities, though we have also identified opportunities in our other businesses as well. In addition to the HSS market opportunity, we believe that our mills are well positioned to flexibly produce a variety of other steel pipe and tube products with modest incremental capital expenditures. We believe that supportive macroeconomic conditions in the United States and Canada, as well as the



 

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implementation of certain U.S. trade actions, present opportunities for us to selectively and flexibly grow volumes in our EFM and Pipe segments and our energy tubular product line by regaining share from now-uncompetitive imports. These specific initiatives are described in further detail below.

In addition to these growth opportunities, we continually assess expanding into new steel pipe and tube products and/or expanding our contract manufacturing arrangements. We also maintain and monitor a pipeline of potential acquisition targets. We believe we have a demonstrated track record of successfully acquiring and integrating businesses.

We Intend to Grow by Optimizing and Modernizing Capacity to Capitalize on Market Opportunities.

For the LTM Period, we estimate that utilization levels for our key business segments were 70-75% for Atlas (inclusive of our Blytheville, Arkansas manufacturing facility, which we are currently in the process of restarting and modernizing), 75-80% for EFM and 80-85% for Pipe (inclusive of our currently idled Mill Street manufacturing facility in Sharon, Pennsylvania). We believe that strong demand for our products and sustained strength in our products’ end markets present us with a number of opportunities to flexibly grow production and sales by increasing utilization across our portfolio of manufacturing facilities. We also believe that our industry leading scale and advantaged geographic footprint, together with our sophisticated logistics and information sharing systems and manufacturing facilities’ production flexibility, uniquely position us to optimize our capacity by rapidly responding to improving market conditions. Strength in end-market demand for domestically produced products is further supported by the anticipated favorable competitive impact to our business from the implementation of trade actions against unfairly traded steel and steel products in connection with Section 232.

Within our Atlas business, we are in the process of increasing utilization and optimizing production capacity to respond to current and anticipated market conditions. Specific capacity optimization initiatives that are currently underway include:

 

   

We are restarting and modernizing our previously idled Blytheville, Arkansas manufacturing facility in response to strong and growing end-market demand for structural tubing products in the Southeast and Southwest regions of the United States.

 

   

In connection with the restart of our Blytheville facility, we intend to optimize and geographically rationalize production of certain structural tubing products at our Chicago, Illinois HSS mill.

 

   

In response to market conditions in Canada, we have begun the construction of a new HSS mill at our Harrow, Ontario operation.

Within our other business units, we have also identified a number of opportunities to optimize production and increase utilization in response to anticipated demand growth in our key markets and geographies. Specific initiatives include:

 

   

Within our EFM business, we are in the process of optimizing the mix at our Chicago, Illinois Pipe facility and our Long Beach, California facility by increasing output of fence products with a more differentiated market position and potential higher operating margin.

 

   

We are in the process of optimizing mix at our Warren, Ohio manufacturing facility and producing more energy tubular products by increasing utilization of existing capacity at little incremental capital cost in response to growing demand for domestically produced energy tubular products due to higher drilling activity in the United States and Canadian oil and gas end market and improving competitive dynamics for energy tubular products relative to foreign imports.



 

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Within our Pipe business, although no decision has been made, we have the opportunity to restart our Mill Street manufacturing facility in Sharon, Pennsylvania, which was previously idled in fiscal year 2015. We believe that if the Mill Street facility is restarted, we would have the opportunity to shift over production of small diameter pipe from our Council Avenue facility in Wheatland, Pennsylvania, which would position our Council Avenue facility to increase production of larger diameter products.

A summary of selected optimization and modernization initiatives and other identified opportunities is included in the following table.

Summary of Selected Potential Capacity Optimization Initiatives

 

Manufacturing Facility

 

Reportable
Segment

 

Description

  Production
Capacity
(kt)
    Estimated
Start-up
Costs ($ in
millions)
    Anticipated
Completion
 

Blytheville(1)

  Atlas   In-Process Restart     120         2019  

Blytheville(2)

  Atlas   Restart & Mill Modernization     270         2019  

Subtotal:

        390     $ 30    

Harrow

  Atlas   New Mill Addition     80     $ 14       2019  

Mill Street(3)

  Pipe   Idled, Potential Restart     75     $ 5       2019  

Council Avenue(3)(4)

  Pipe   Potential Mix Shift Optimization     55       —         2019  

 

(1)

Inclusive of 73 kt of production during the LTM Period and current production capacity of 120 kt.

(2)

Inclusive of 62 kt increase in production capacity relative to current production capacity of 208 kt. Increase in production capacity due to mill modernization.

(3)

No decision has been made yet with respect to this project.

(4)

Represents 130 kt of potential incremental production capacity, net of 75 kt of production capacity shifted to Mill Street.

We also have the Opportunity to Grow by Building New Capacity to Capitalize on Market Opportunities.

Alongside our efforts to optimize our existing capacity, we have also identified opportunities to profitably add additional production capacity to enhance our operating footprint and grow our positions in certain markets. Specifically, for our structural tubing and related piling products, we believe there is an opportunity to add further capacity at our Blytheville manufacturing facility, particularly for the production of the largest diameter structural tubing products which are commonly used in infrastructure projects outside of the United States, but have had limited domestic acceptance to date. Within the United States, demand for these large diameter structural tubing products historically has been satisfied by imports, primarily from Japan, although we believe domestic demand for these products has also been minimal due to limited availability of supply. We now believe that market conditions may be supportive of adding domestic production capacity for these products, given the anticipated increase in infrastructure spend in the United States. We also believe that trade actions on unfairly traded steel in connection with Section 232 could enhance the competitive positioning of potential domestic production. Additional investments in finishing line equipment could also be made to supply large diameter pipeline products to meet demand in the energy tubular market. While no final construction decisions have been made, we estimate that the construction of a new large diameter structural tubing mill at our Blytheville manufacturing facility with annual production capacity of up to 400 kt would cost approximately $125 million, with first production within 24-36 months of project approval.



 

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We have Made an Investment in the Fast-Growing Business of Permanent Modular Construction.

We are in the early stages of developing a new business, called Z Modular, to take advantage of what we believe to be attractive market trends in modular construction. Modular construction and our modular construction products allow for potential reductions in cost of design, fabrication and building assembly through a standardized and scalable connection system for structural modules primarily designed for non-residential building uses.

The permanent modular construction industry is a growing segment within the overall commercial construction market. According to the Modular Building Institute, the modular construction market reported estimated revenues of approximately $3 billion in 2016, up 50% from estimated revenues of $2 billion in 2011, with modular construction project spending accounting for only 3.2% of the total value of North American construction starts of nearly $190 billion in 2016 in the key construction market segments of multifamily housing, retail / commercial, education, healthcare, institutional and assembly and office and administrative. The modular construction market is anticipated to continue to experience robust growth based on market share expansion, driven by the adoption of modular construction in lieu of traditional onsite construction, as well as growth in non-residential construction spending.

Z Modular designs, manufactures and installs permanent modular buildings using our patented VectorBloc Building System of construction. We believe the VectorBloc Building System is the most precise structural connection system available and offers best in class in quality, build-out efficiency and total project value. Our unique proprietary patented connections allow for rapid finished vertical construction up to 14 stories in height.

We also believe that there is an opportunity for Z Modular to be a source of pull-through demand for our steel pipe and tube products, particularly HSS. The Vectorbloc Building System utilizes HSS frames as the structural support of the building, thereby qualifying the building as Type II construction, or construction using non-combustible materials. HSS used in the Vectorbloc Building System can also be employed in multiple industrial applications, including for data center components such as HVAC units, power skids and battery systems. As such, we believe there is opportunity to grow HSS market share by increasing the penetration of HSS through the use of the Z Modular’s product offering.

We intend to participate in the permanent modular construction industry in the United States and Canada as a full-service designer, manufacturer and installer of permanent modular construction and by selling our products, including VectorBlocs and HSS frames, to developers as well as services to authorized modular construction partners that build using our technology. We also believe there is a market to license our technology outside of the United States and Canada. As of June 30, 2018, we have made a modest cumulative investment of $12.1 million in property, plant and equipment and intangible assets to prove out our concepts, establish optimal manufacturing methods and establish a commercially viable product line, and we estimate the annual module production capacity of our Birmingham, Alabama facility to be between 750,000—1,000,000 square feet. We anticipate additional modest capital investments in the near-term, including fiscal year 2019, as we continue to establish the business. Over the long-term, the nature and extent of our investments will be dictated by the development of the market and opportunities that may arise.



 

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Business Strategy

Our primary objective is to create value by sustaining growth in earnings and cash flows from operating activities over various economic cycles. To achieve this objective, we strive to improve our cost structure, provide high quality service and products, expand our product offerings and increase our market share.

Expand Leading Market Positions.    We believe that our leading market position and scale are our most compelling competitive strengths. Our management team is focused on expanding market share, which we believe will generate operating leverage and improved financial performance. We believe this can be accomplished through acquisitions and organic initiatives, including offering new products, serving additional end markets and increasing customer penetration and geographic coverage. As part of our business strategy, we evaluate acquisition opportunities from time to time.

Optimize Our Portfolio and Product Mix to be Responsive to Market Conditions.    We seek to maintain flexibility to adjust our product mix and rapidly respond to changing market conditions. While prioritizing our highest margin products, we regularly evaluate our portfolio of assets to ensure that our offerings are responsive to prevailing market conditions. Our recent restart of our Blytheville, Arkansas manufacturing facility and the ongoing construction of additional production capacity at our Harrow, Ontario manufacturing facility reflect our continued focus on responding to our markets’ needs. We will continue to assess and pursue other similar opportunities to utilize, optimize and grow production capacity to capitalize on market opportunities.

Provide Superior Quality Products and Customer Service.    Our products play a critical role in a variety of construction, infrastructure, equipment and safety applications. Our emphasis on manufacturing processes, quality control testing and product development helps us deliver a high-quality product to our customers. We focus on providing superior customer service through our geographic manufacturing footprint and continued development of our proprietary, vendor managed AIM system, as well as our experienced customer service teams and sales forces. We also seek to provide high-quality customer service through continued warehouse optimization, including increased digitization and automation of certain systems to debottleneck loading and dispatch logistics and improve truck availability. With respect to warehouse optimization through automation, we have been successful implementing these systems at our facility in Blytheville, Arkansas, and we intend to leverage this success by selectively rolling out this innovation to our other facilities. We believe that superior warehouse, transportation and shipping logistics and ultimate speed of delivery represents a key area of commercial differentiation relative to our competitors.

Focus on Efficient Manufacturing and Cost Management.    We strive for continued operational excellence with the goal of providing high-quality products at competitive prices. Our operating personnel continually examine costs and profitability by product, plant and region. Our goal is to maximize operational benchmarks by leveraging skilled manufacturing and supply chain management processes.

Focus on Key Supplier Relationships.    We believe that our relationships with our key suppliers provide a competitive advantage in serving our customers. We have developed purchasing programs that we believe improve our access to raw materials and reduce our lead times. Our ability to provide our suppliers with accurate information regarding our future demands is critical to this relationship. In doing so, we are focused on accurate demand planning and have invested in systems to enhance this function.

Execute Pricing Strategy to Pass through Underlying Costs.    We believe we have a track record of managing underlying commodity price exposure through our price negotiation, raw material



 

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procurement and inventory management program. In addition to managing underlying commodity prices, more recently we have had success in sharing transportation costs with our customers through our product pricing strategies, particularly for our electrical conduit products. We believe there is opportunity to implement this pricing strategy for our other products as well.

Our History

The Zekelman family founded our largest business, Atlas Tube (“Atlas Tube” or “Atlas”), in 1984, and has a long history of successful leadership in the steel pipe and tube industry. Barry Zekelman, our Executive Chairman and CEO, and his brothers, Alan Zekelman and Clayton Zekelman, members of our Board of Directors, assumed leadership of Atlas from their father in 1986 and led it through a period of robust growth. Since 1986, our Company has grown from a single structural tubing manufacturing facility located in Harrow, Ontario with annual sales of less than $1.5 million, to a leading North American manufacturer of industrial steel pipe and tube products, with 13 pipe and tube production facilities across seven U.S. states and one Canadian province with total production of approximately 2.1 million tons from our continuing operations and net sales of $2.6 billion for the LTM Period.

Zekelman Industries has grown both through organic investment as well as selective strategic acquisitions. In 2006, Atlas merged with the John Maneely Company, a predecessor company founded in 1877 that was acquired by The Carlyle Group (“Carlyle”) earlier in 2006. Upon consummation of the merger, the Company was renamed JMC Steel Group, Inc. (“JMC Steel”). Subsequent to this merger, Barry Zekelman served as Chief Operating Officer (“COO”) of JMC Steel between 2006 and 2008, during which time he completed the acquisition and integration of Sharon Tube Company. In 2008, Barry Zekelman was named CEO, a position which he held until March 2010, at which point he was appointed as our Executive Chairman. In fiscal year 2011, we and Barry Zekelman purchased a portion of our outstanding stock that was held by Carlyle. Barry Zekelman returned to the CEO position of JMC Steel in February 2013. In fiscal year 2014, we repurchased all remaining outstanding stock held by Carlyle. Effective April 28, 2016, we changed our name from JMC Steel Group, Inc. to Zekelman Industries, Inc. to better reflect the broad nature of our business and the reputation of the Zekelman family in steel pipe and tube markets. During fiscal year 2017, we successfully completed the acquisition and integration of both Western Tube and American Tube.

Selected Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

   

Demand for our products is impacted by general economic conditions in the United States, Canada and globally, as well as conditions in the non-residential construction, infrastructure and other end markets that our products are used in;

 

   

We generally do not obtain long-term purchase commitments from customers or long-term supply commitments from steel, transportation and other suppliers;

 

   

Our business is significantly impacted by the price and supply of steel, primarily HRC, which has been volatile;

 

   

Our business could be impacted in a number of ways by United States, Canadian and global trade and tariff actions, and the effects of recent and future actions are unpredictable;

 

   

We sell our products in competitive markets and must successfully compete based on price, delivery and other attributes;



 

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Levels of imports of steel that impact steel prices generally, and of steel products that compete with our products can impact our business;

 

   

We have grown our business through acquisitions in the past, and we may be unable to continue to successfully execute and integrate acquisitions;

 

   

We face risks and challenges associated with resuming production at idled facilities and with our planned and potential construction and production optimization and modernization activities;

 

   

We are subject to significant environmental, health and safety laws and other regulations; and

 

   

Our multiple class structure will have the effect of concentrating voting control with entities controlled by members of the Zekelman family.

Corporate Information

Zekelman Industries was incorporated in the state of Delaware on February 13, 2006 and changed its name from JMC Steel Group, Inc. to Zekelman Industries, Inc. on April 28, 2016. Our principal headquarters is located at 227 West Monroe Street, Suite 2600, Chicago, IL 60606. Our telephone number is (312) 275-1600. Our website is www.zekelman.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

Our Structure and Principal Stockholders

Prior to this offering, our outstanding capital stock consists of common stock (the “Pre-IPO Voting Common Stock”), non-voting common stock (the “Pre-IPO Non-Voting Common Stock”) and special voting shares (the “Special Voting Shares”) that correspond on a one-for-one basis with exchangeable shares (the “Exchangeable Shares”) in one of our subsidiaries. Barry Zekelman, our Executive Chairman and CEO, and Alan Zekelman and Clayton Zekelman, members of our Board of Directors, indirectly own all outstanding shares of our capital stock through holding companies.

In connection with this offering, we will take the following actions to reorganize our capital structure immediately prior to the consummation of this offering (these actions are collectively referred to in this prospectus as the “Reorganization”):

 

   

We will amend and restate our certificate of incorporation to create authorized shares of Class A subordinate voting stock and Class B multiple voting stock, each with such terms and conditions as are described under “Description of Capital Stock—Class A Subordinate Voting Stock and Class B Multiple Voting Stock” in this prospectus;

 

   

Each outstanding share of Pre-IPO Voting Common Stock and Pre-IPO Non-Voting Common Stock will be reclassified into 1,000 shares of Class B multiple voting stock and our amended and restated certificate of incorporation will no longer provide for any authorized Pre-IPO Voting Common Stock and Pre-IPO Non-Voting Common Stock; and

 

   

Each Special Voting Share and Exchangeable Share will be split into 1,000 Special Voting Shares and Exchangeable Shares, respectively, and the terms of our Special Voting Shares and Exchangeable Shares will be amended to reflect the reorganization transactions described above and otherwise to have such terms and conditions as are described under “Description of Capital Stock—Special Voting Shares and Exchangeable Shares” in this prospectus.



 

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After the Reorganization, but before giving effect to this offering, Barry Zekelman, Alan Zekelman and Clayton Zekelman will continue to indirectly own all outstanding shares of our capital stock.

Following this offering, Barry Zekelman, Alan Zekelman and Clayton Zekelman will continue to own a controlling interest in us and will indirectly own all outstanding shares of our Class B multiple voting stock and Special Voting Shares, representing approximately 97% of the voting power of our outstanding capital stock. Because the shares of our Class B multiple voting stock and our Special Voting Shares have ten votes per share, so long as members of the Zekelman family and their permitted transferees hold at least 15% of our outstanding capital stock, they will collectively continue to control the outcome of matters submitted to our stockholders for approval. Once the outstanding shares of our Class B multiple voting stock (plus the number of Exchangeable Shares then outstanding) represent less than 15% of the then outstanding shares of our Class A subordinate voting stock and Class B multiple voting stock (plus the number of Exchangeable Shares then outstanding), all shares of Class B multiple voting stock will automatically convert into shares of our Class A subordinate voting stock and we will then have only a single class of common stock entitled to one vote per share. See “Principal and Selling Stockholders” and “Description of Capital Stock.”



 

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The Offering

 

Class A subordinate voting stock offered by us

27,750,000 shares

 

Class A subordinate voting stock offered by the selling stockholders

14,000,000 shares (or 20,262,500 shares if the underwriters exercise their option to purchase additional shares in full)

 

Class A subordinate voting stock to be outstanding after this offering

41,750,000 shares (or 48,012,500 shares if the underwriters exercise their option to purchase additional shares in full)

 

Class B multiple voting stock to be outstanding after this offering or issuable upon exchange of Exchangeable Shares

144,912,250 shares (includes 111,511,250 shares issuable upon exchange of Exchangeable Shares)

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our Class A subordinate voting stock in this offering will be approximately $468.7 million, based upon the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds of this offering to repay a portion of our outstanding indebtedness under our Term Loan Facility. The Term Loan Facility has a maturity date of June 14, 2021 and, as of June 30, 2018, an interest rate per annum of 4.6%. As of June 30, 2018, we had $907.1 million of indebtedness outstanding under our Term Loan Facility and $1.3 billion of total indebtedness outstanding (excluding $10.3 million of letters of credit). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Note 10—Long-Term Debt” to our consolidated annual and interim financial statements included in this prospectus.

 

  We will not receive any of the proceeds from the sale of Class A subordinate voting stock in this offering by the selling stockholders. See “Use of Proceeds” for additional information.

 

Voting rights

Shares of our Class A subordinate voting stock are entitled to one vote per share.


 

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  Shares of our Class B multiple voting stock and Special Voting Shares are entitled to ten votes per share.

 

  For so long as the Exchangeable Shares are exchangeable for shares of our Class B multiple voting stock, holders of our Special Voting Shares will be entitled to ten votes for each share held. Upon the automatic conversion of our Class B multiple voting stock into shares of Class A subordinate voting stock on the Automatic Conversion Date (as defined herein), the Exchangeable Shares will be exchangeable for shares of our Class A subordinate voting stock only, and thereafter holders of our Special Voting Shares will be entitled to only one vote for each share.

 

  Holders of our Class A subordinate voting stock, Class B multiple voting stock and Special Voting Shares will generally vote together as a single class, unless otherwise required by law. The holders of our outstanding Class B multiple voting stock and Special Voting Shares will represent approximately 97% of the voting power of our outstanding capital stock following this offering and will be owned by entities controlled by members of the Zekelman family. As a result, these entities will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See “Principal and Selling Stockholders” and “Description of Capital Stock” for additional information.

 

Conversion rights

Shares of Class A subordinate voting stock are not convertible into any other class of stock, including Class B multiple voting stock. Shares of Class B multiple voting stock are convertible into Class A subordinate voting stock on a one-for-one basis at the option of the holder. In addition, our Class B multiple voting stock will automatically convert into Class A subordinate voting stock in certain circumstances. See “Description of Capital Stock.”

 

Dividend policy

Following this offering, subject to applicable law, we expect that we will pay quarterly cash dividends on our Class A subordinate voting stock in an initial amount equal to $0.03 per share (or approximately $22.0 million annually in the aggregate inclusive of dividends payable to



 

21


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our Class B multiple voting stock and Exchangeable Shares). We expect these dividends would commence in the second quarter of fiscal year 2019. However, there is no assurance that this initial dividend amount will be sustained or that we will continue to pay dividends in the future. See “Dividend Policy.”

 

Proposed trading symbols

“ZEK” on the NYSE.

 

  “ZEK” on the Toronto Stock Exchange.

 

Reserved share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of Class A subordinate voting stock offered by this prospectus for sale to certain of our directors, officers, employees, business associates and related persons. See “Underwriting.”

 

Controlled company

Upon completion of this offering, entities controlled by members of the Zekelman family will continue to own a controlling interest in us. Therefore, we expect to be a “controlled company” within the meaning of the corporate governance rules of the NYSE.

 

Risk factors

Investing in our Class A subordinate voting stock involves a high degree of risk. See “Risk Factors” beginning on page 29 of this prospectus for a discussion of factors you should carefully consider before investing in our Class A subordinate voting stock.

The number of shares of our Class A subordinate voting stock and Class B multiple voting stock that will be outstanding after this offering gives effect to, in addition to the issuance of the shares of Class A subordinate voting stock offered by us in this offering, the exchange of 11,140,750 Exchangeable Shares for 11,140,750 shares of Class A subordinate voting stock offered by selling stockholders in this offering and the exercise of 2,859,250 options, at a weighted-average exercise price of $3.16 per share, to purchase shares of Class A subordinate stock offered by selling stockholders in this offering, and excludes the following:

 

   

8,779,750 shares of Class A subordinate voting stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $3.60 per share after giving effect to the Reorganization and this offering; and

 

   

4,000,000 shares of Class A subordinate voting stock available for future issuance pursuant to awards that may be granted under our 2018 Equity Plan (as defined herein) that we expect to adopt in connection with this offering.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the completion of the Reorganization;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;



 

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no exercise of outstanding stock options subsequent to September 7, 2018 (other than in connection with this offering by selling stockholders); and

 

   

no exercise by the underwriters of their option to purchase up to an additional 6,262,500 shares of our Class A subordinate voting stock from certain selling stockholders.

In this prospectus, other than in our consolidated financial statements and the related notes, references to the number of outstanding stock options, the class of shares for which they are exercisable and the exercise prices of such options have been adjusted to give effect to the Reorganization.

In various places in this prospectus, such as “Dilution,” and “Principal and Selling Stockholders,” as so indicated, we have presented information based on the assumption that all Exchangeable Shares have been exchanged for shares of Class B multiple voting stock and the corresponding Special Voting Shares have been cancelled without consideration. We have presented information in this way because, together, the Exchangeable Shares and Special Voting Shares are intended to be the economic and voting equivalent of shares of Class B multiple voting stock and therefore we believe this information is useful to investors in understanding our capital structure. However, this presentation is not intended to convey any information about when or if the Exchangeable Shares will actually be exchanged. See “Description of Capital Stock—Special Voting Shares and Exchangeable Shares.”



 

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Summary Consolidated Financial and Other Data

The following tables set forth summary consolidated financial and other data.

The summary consolidated financial information presented below under the captions “Statement of operations data,” “Other financial data” and “Statement of cash flows data” for the fiscal years ended September 30, 2017, September 24, 2016 and September 26, 2015 has been derived from our consolidated financial statements that have been audited by Ernst & Young LLP, our independent registered public accounting firm, and are included elsewhere in this prospectus.

The summary interim consolidated financial information presented below under the captions “Statement of operations data,” “Other financial data” and “Statement of cash flows data” for the 13 weeks and 39 weeks ended June 30, 2018 and June 24, 2017, and the summary consolidated financial information presented below under the caption “Balance sheet data” as of June 30, 2018 have been derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The summary interim consolidated financial information presented below under the caption “Balance Sheet Data” as of June 24, 2017 has been derived from our unaudited interim consolidated financial statements that are not included in this prospectus. All summary interim consolidated financial information has been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the interim data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results for these periods and such data has been prepared on the same basis as the audited financial information. Interim results may not be indicative of full year results and historical results may not necessarily be indicative of results that may be expected for any future period.

We have also presented summary unaudited consolidated financial information for the 53 weeks ended June 30, 2018 (this period is referred to in this prospectus as the “LTM Period”). All summary unaudited consolidated financial information presented below for the LTM Period has been derived from the mathematical combination of (1) the audited consolidated financial information for the fiscal year ended September 30, 2017 and (2) the unaudited interim consolidated financial information for the 39 weeks ended June 30, 2018, less (3) the unaudited interim consolidated financial information for the 39 weeks ended June 24, 2017. We have presented this financial data because we believe it provides our investors with useful information to assess our recent performance.



 

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The summary consolidated financial data presented below should be read in conjunction with “Selected Historical Consolidated Financial and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    13 Weeks
Ended

June 30,
2018
    13 Weeks
Ended
June 24,
2017
    39 Weeks
Ended

June 30,
2018
    39 Weeks
Ended

June 24,
2017
    LTM Period
June 30,

2018
    Year Ended
September 30,

2017
    Year Ended
September 24,

2016
    Year Ended
September 26,

2015
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)                    
    (in thousands, except share, per share and per ton amounts)  

Statement of operations data:

               

Net sales

  $ 783,134     $ 564,226     $ 1,981,735     $ 1,480,901     $ 2,596,089     $ 2,095,255     $ 1,554,491     $ 1,712,547  

Cost of sales

    571,359       446,436       1,508,763       1,156,454       2,010,009       1,657,700       1,200,215       1,466,797  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    211,775       117,790       472,972       324,447       586,080       437,555       354,276       245,750  

Expenses:

               

Selling, general and administrative expenses

    51,955       38,291       138,357       107,905       181,769       151,317       130,214       123,103  

Transaction costs

                      731             731              

Exit and restructuring costs

          392       108       1,764       217       1,873       1,970       8,771  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    51,955       38,683       138,465       110,400       181,986       153,921       132,184       131,874  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    159,820       79,107       334,507       214,047       404,094       283,634       222,092       113,876  

Other expense (income), net:

               

Interest expense, net

    23,049       22,421       65,490       69,045       88,584       92,139       95,931       98,511  

Other expense (income), net

    3,263       (1,302     7,945       400       404       (7,141     25,074       14,242  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    26,312       21,119       73,435       69,445       88,988       84,998       121,005       112,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    133,508       57,988       261,072       144,602       315,106       198,636       101,087       1,123  

Provision (benefit) for income taxes

    33,265       9,964       55,413       24,830       65,923       35,340       16,008       (4,637
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    100,243       48,024       205,659       119,772       249,183       163,296       85,079       5,760  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations, net of income taxes

    (320     (146     (1,034     209       (3,065     (1,822     (16,580     (69,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 99,923     $ 47,878     $ 204,625     $ 119,981     $ 246,118     $ 161,474     $ 68,499     $ (63,670
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders—basic(1)

  $ 14,312     $ 7,102     $ 29,494     $ 17,494     $ 35,487     $ 23,487     $ 10,048     $ (9,844
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders—diluted(1)

  $ 86,237     $ 41,351     $ 176,715     $ 104,738     $ 213,293     $ 141,316     $ 59,277     $ (61,073
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—basic(1):

               

Continuing operations

  $ 597.25     $ 296.30     $ 1,232.99     $ 726.46     $ 1,494.47     $ 987.94     $ 517.27     $ 35.44  

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (18.30     (10.94     (99.30     (444.92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 595.34     $ 295.42     $ 1,226.87     $ 727.70     $ 1,476.17     $ 977.00     $ 417.97     $ (409.48
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—diluted(1):

               

Continuing operations

  $ 589.79     $ 282.77     $ 1,210.79     $ 712.76     $ 1,472.32     $ 974.29     $ 503.39     $ 28.59  

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (18.30     (10.94     (99.30     (444.92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 587.88     $ 281.89     $ 1,204.67     $ 714.00     $ 1,454.02     $ 963.35     $ 404.09     $ (416.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic

    24,040       24,040       24,040       24,040       24,040       24,040       24,040       24,040  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Table of Contents
    13 Weeks
Ended

June 30,
2018
    13 Weeks
Ended
June 24,
2017
    39 Weeks
Ended

June 30,
2018
    39 Weeks
Ended

June 24,
2017
    LTM Period
June 30,

2018
    Year Ended
September 30,

2017
    Year Ended
September 24,

2016
    Year Ended
September 26,

2015
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)                    
    (in thousands, except share, per share and per ton amounts)  

Weighted average common shares outstanding—diluted

    146,692       146,692       146,692       146,692       146,692       146,692       146,692       146,692  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to non-voting common stockholders—basic and diluted(1)

  $ 4,935     $ 1,489     $ 9,571     $ 5,536     $ 11,905     $ 7,870     $ 2,636     $ (5,110
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per non-voting common share—basic and diluted(1):

               

Continuing operations

  $ 529.10     $ 159.94     $ 1,028.55     $ 590.15     $ 1,290.06     $ 851.66     $ 380.89     $ (100.96

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (18.30     (10.94     (99.30     (444.92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 527.19     $ 159.06     $ 1,022.43     $ 591.39     $ 1,271.76     $ 840.72     $ 281.59     $ (545.88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average non-voting common shares outstanding—basic and diluted

    9,361       9,361       9,361       9,361       9,361       9,361       9,361       9,361  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data (unaudited):

               

Adjusted EBITDA

  $  185,435     $ 101,493     $ 403,770     $ 280,629     $ 492,462     $ 369,321     $ 292,224     $ 193,969  

Adjusted EBITDA margin

    23.7     18.0     20.4     18.9     19.0     17.6     18.8     11.3

Tons sold (kt)

    532       477       1,546       1,344       2,076       1,874       1,667       1,678  

Adjusted EBITDA per ton

  $ 348.56     $ 212.77     $ 261.17     $ 208.80     $ 237.22     $ 197.08     $ 175.30     $ 115.60  

Statement of cash flows data:

               

Net cash provided by operating activities

      $ 100,919     $ 83,541     $ 176,423     $ 159,045     $ 174,124     $ 202,607  

Net cash used in investing activities

      $ (62,740   $ (225,936   $ (78,021   $ (241,217   $ (38,379   $ (47,942

Net cash (used in) provided by financing activities

      $ (22,858   $ 135,023     $ (84,003   $ 73,878     $ (134,333   $ (147,726

Capital expenditures

      $ (60,870   $ (34,045   $ (73,640   $ (46,815   $ (38,398   $ (47,114

 

(1)

Following this offering, our Class A subordinate voting stock and Class B multiple voting stock will have identical economic rights and both net income (loss) available to common stockholders and earnings (loss) per common share will be calculated to account for both classes. We expect to no longer present separate line items for two classes of common stock as we have historically. See the summary unaudited consolidated pro forma earnings (loss) per share information below in the “Pro Forma Earnings (Loss) per Share Data” section.

 

     As of June 30, 2018      As of June 24, 2017  
     Actual      Pro Forma
As Adjusted(1)
     Actual  
    

(unaudited)

(in thousands)

 

Balance sheet data:

        

Cash and cash equivalents

   $ 36,617      $ 44,516      $ 27,394  

Operating working capital(2)

   $ 605,891      $ 605,891      $ 440,023  

Total assets, including amounts held for sale

   $ 2,455,493      $ 2,463,392      $ 2,249,042  

Total debt, including current portion

   $ 1,314,422      $ 849,792      $ 1,359,640  

Total liabilities, including amounts held for sale

   $ 1,803,276      $ 1,337,521      $ 1,825,551  

Total stockholders’ equity

   $ 652,217      $ 1,125,871      $ 423,491  

 

(1)

The pro forma as adjusted column gives effect to the Reorganization, this offering and the application of the net proceeds thereof described in “Use of Proceeds” and “Capitalization.”

(2)

Operating working capital is a financial metric used by management, calculated as accounts receivable, net, plus inventories, net, less accounts payable.



 

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Table of Contents

Pro Forma Earnings (Loss) per Share Data

In the table below we have presented summary unaudited consolidated earnings (loss) per share information for the 13 weeks and 39 weeks ended June 30, 2018 and June 24, 2017, the LTM Period and the fiscal years ended September 30, 2017, September 24, 2016 and September 26, 2015 on a pro forma basis to reflect the completion of the Reorganization as if it had occurred at the beginning of fiscal year 2015. For purposes of this pro forma presentation, dividends declared and paid during the periods, as well as undistributed earnings, have been allocated on a pro rata basis to all Class B multiple voting stock and Exchangeable Shares that will be outstanding following the Reorganization. Although there will be no Class A subordinate voting stock outstanding solely as a result of the Reorganization before giving effect to the offering, for presentation purposes, the pro forma earnings (loss) per share information is shown for our Class A subordinate voting stock and our Class B multiple voting stock on a combined basis, as these two classes of capital stock will have identical economic rights following this offering. This presentation is consistent with the way we expect to present earnings (loss) per share going forward as a public company.

This historical pro forma earnings (loss) per share information is illustrative only and does not purport to be an indication of our results for any future period. In addition, it only gives effect to the Reorganization and does not give effect to the issuance of shares in this offering or the application of the proceeds thereof as described in “Use of Proceeds.” You should consider this pro forma information along with the remainder of the information in this section “Prospectus Summary—Summary Consolidated Financial and Other Data” and other sections of this prospectus entitled “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    13 Weeks
Ended
June 30,
2018
    13 Weeks
Ended
June 24,
2017
    39 Weeks
Ended
June 30,
2018
    39 Weeks
Ended
June 24,
2017
    LTM Period
June 30,
2018
    Year Ended
September 30,
2017
    Year Ended
September 24,
2016
    Year Ended
September 26,
2015
 

Pro forma net income (loss) available to Class A and Class B common stockholders—basic and diluted (in thousands)

  $ 21,387     $ 10,248     $ 43,797     $ 25,681     $ 52,678     $ 34,562     $ 14,661     $ (13,628
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings (loss) per Class A and Class B common share— basic:

               

Continuing operations

  $ 0.64     $ 0.31     $ 1.32     $ 0.77     $ 1.60     $ 1.05     $ 0.55     $ 0.04  

Discontinued operations

                (0.01           (0.03     (0.02     (0.11     (0.45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 0.64     $ 0.31     $ 1.31     $ 0.77     $ 1.57     $ 1.03     $ 0.44     $ (0.41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings (loss) per Class A and Class B common share—diluted:

               

Continuing operations

  $ 0.52     $ 0.27     $ 1.08     $ 0.68     $ 1.33     $ 0.93     $ 0.51     $ 0.04  

Discontinued operations

                (0.01           (0.02     (0.01     (0.10     (0.44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 0.52     $ 0.27     $ 1.07     $ 0.68     $ 1.31     $ 0.92     $ 0.41     $ (0.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average Class A and Class B common shares outstanding—basic

    33,401,000       33,401,000       33,401,000       33,401,000       33,401,000       33,401,000       33,401,000       33,401,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average Class A and Class B common shares outstanding—diluted

    41,143,779       37,559,691       40,898,180       37,518,987       40,947,933       37,568,740       35,641,237       33,691,236  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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Non-GAAP Reconciliation

The following table includes a reconciliation of Adjusted EBITDA to income from continuing operations. For more information about our use of Adjusted EBITDA, see “Non-GAAP Financial Measures.”

 

    13 Weeks
Ended
June 30,
2018
    13 Weeks
Ended
June 24,
2017
    39 Weeks
Ended
June 30,
2018
    39 Weeks
Ended
June 24,
2017
    LTM
Period

June 30,
2018
    Year Ended
September 30,

2017
    Year Ended
September 24,

2016
    Year Ended
September 26,

2015
 
    (in thousands, except per ton amounts)  

Income from continuing operations

  $ 100,243     $ 48,024     $ 205,659     $ 119,772     $ 249,183     $ 163,296     $ 85,079     $ 5,760  

Interest expense, net

    23,049       22,421       65,490       69,045       88,584       92,139       95,931       98,511  

Provision (benefit) for income taxes

    33,265       9,964       55,413       24,830       65,923       35,340       16,008       (4,637

Depreciation and amortization of intangibles

    19,861       19,210       58,214       53,615       79,570       74,971       67,509       64,422  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations

    176,418       99,619       384,776       267,262       483,260       365,746       264,527       164,056  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exit and restructuring activities(a)

          392       108       1,764       217       1,873       1,970       8,771  

Foreign currency losses (gains) on intercompany borrowings(b)

    5,026       (1,557     10,981       2,054       (314     (9,241     (2,172     20,551  

Stock-based compensation expense(c)

    293       256       4,057       778       4,313       1,034       3,076       4,011  

Inventory valuation amortization(d)

          2,783             8,198             8,198              

Transaction costs(e)

                      731             731              

Debt modification costs(f)

    995             995       1,587       2,133       2,725       5,480        

Bargain purchase gain(g)

                      (1,745           (1,745            

Loss (gain) on extinguishment of debt(h)

    360             360             360             19,343       (4,480

Impairment of consumable supplies inventory(i)

                                              1,047  

Other(j)

    2,343             2,493             2,493                   13  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 185,435     $ 101,493     $ 403,770     $ 280,629     $ 492,462     $ 369,321     $ 292,224     $ 193,969  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin(k)

    23.7     18.0     20.4     18.9     19.0     17.6     18.8     11.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA per ton(l)

  $ 348.56     $ 212.77     $ 261.17     $ 208.80     $ 237.22     $ 197.08     $ 175.30     $ 115.60  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Exit and Restructuring Activities:    Represents expenses, including employee-related costs, defined benefit plan curtailment and other charges, lease termination costs and impairment charges, associated with idled or closed facilities and other exit costs.

(b)

Foreign Currency Losses (Gains) on Intercompany Borrowings:    Represents foreign currency losses (gains) related to intercompany loans denominated in currencies other than the functional currencies of the related entities.

(c)

Stock-based Compensation Expense:    Represents the non-cash compensation expense related to stock options.

(d)

Inventory Valuation Amortization:    Represents the purchase price adjustment to write up to estimated fair value the inventory acquired in connection with the acquisitions of Western Tube and American Tube. The amounts were amortized to cost of sales as the inventory was sold in periods subsequent to each of the transaction’s closing dates.

(e)

Transaction Costs:    Represents professional service fees incurred in connection with the acquisitions of Western Tube and American Tube.

(f)

Debt Modification Costs:    Represents the costs related to the February 2017, August 2017 and May 2018 amendments of our Senior Secured Term Loan Credit Facility (as amended, the “Term Loan Facility”) and a portion of our overall costs related to the June 2016 amendment and restatement of our Term Loan Facility, which were required to be expensed immediately based on the portion of the outstanding and new term debt deemed to be modified as opposed to extinguished under the applicable accounting guidance.

(g)

Bargain Purchase Gain:    Represents a gain resulting from the Western Tube acquisition as the estimated fair value of the net assets acquired exceeded the purchase price.

(h)

Loss (Gain) on Extinguishment of Debt:    Represents the losses related to the May 2018 amendment of our Term Loan Facility and our debt refinancing in June 2016, as well as gains related to purchases of our formerly outstanding unsecured senior notes in the open market at a price below par.

(i)

Impairment of Consumable Supplies Inventory:    Represents consumable supplies inventory impairments that were recorded within cost of sales.

(j)

Other:    Primarily represents legal and due diligence costs related to uncompleted transactions.

(k)

Adjusted EBITDA Margin:    Calculated as Adjusted EBITDA divided by net sales.

(l)

Adjusted EBITDA Per Ton:    Calculated as Adjusted EBITDA divided by tons sold.



 

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RISK FACTORS

Investing in our Class A subordinate voting stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our Class A subordinate voting stock. Our business, results of operations, financial condition or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be materially and adversely affected. In that event, the market price of our Class A subordinate voting stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business

Our business, results of operations and financial condition may be materially and adversely affected by general economic conditions.

Many aspects of our business, including the demand for our products, are affected by United States, Canadian and global economic conditions. General economic conditions and predictions regarding future economic conditions also affect our financial results. A decrease in demand for our products, customer defaults on payments for our products, or other adverse effects resulting from an economic downturn, may cause us to fail to achieve our anticipated financial results. General economic factors beyond our control that affect our business and end markets include interest rates, recession, inflation, deflation, spending in the non-residential and infrastructure construction and oil and gas end markets, consumer credit availability, consumer debt levels, performance of housing markets, energy costs, tax rates and policy, domestic and foreign trade policies, unemployment rates, commencement or escalation of war or hostilities, the threat or possibility of war, terrorism or other global or national unrest, political or financial instability and other matters that influence spending by our customers. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency or increase in magnitude. In the past, a negative growth economic environment has had a detrimental impact on our business, results of operations and financial condition, and a return to a negative growth economic environment may have similarly detrimental effects on our business, results of operations and financial condition.

A substantial decrease in the price of steel could significantly lower our profitability.

Our products are manufactured from steel, primarily HRC, and as a result, our business is significantly affected by the price and supply of steel. When steel prices are lower, the prices that we charge customers for products may decline, which affects our gross profit. At times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, global capacity, import levels, fluctuations in the costs of raw materials necessary to produce steel, sales levels, competition, consolidation of steel producers, labor costs, import duties and tariffs and foreign currency exchange rates. This volatility can significantly affect the availability and cost of steel. Because of this historical volatility, we are unable to predict whether the significant increases in steel prices over the past few years will continue or be sustained, and our business could be adversely affected if the trend reversed and steel prices declined, especially if the decline was significant or sudden. When steel prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices, lower volume, and consequently, lower profitability.

If steel prices rise, we may be unable to pass along the cost increases to our customers.

We maintain inventories of steel to accommodate the lead time requirements of the products we produce for our customers. Accordingly, we purchase steel in an effort to maintain our inventory at

 

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levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices and market conditions. If steel prices rise, demand for our products, the actions of our competitors and other factors will influence whether we will be able to pass such steel cost increases on to our customers. If we are unsuccessful in passing such steel cost increases to our customers, our profitability will decrease. There could also be a time lag between when changes in prices we pay to purchase steel from suppliers are effective and the point when we can implement corresponding changes under our sales price lists with our customers. As a result, we have unhedged exposure to fluctuations in raw materials prices, as we may temporarily bear the additional cost of higher prices while negotiating new purchase prices. Further, although we seek to pass through prices to our customers, we are not always able to do so. In periods of significant or rapid increases in steel prices, it could be especially challenging to pass on our increased costs in a complete or timely manner.

We may be unable to compete successfully with other companies in our industry.

We sell products in competitive markets. Our revenues and earnings could be adversely affected by competitive actions such as price reductions, improved delivery and other actions by competitors. Our business, results of operations and financial condition could be materially and adversely affected to the extent that our competitors are successful in reducing our customers’ purchases of products from us or by decreasing prices in our market place. Competition could also cause us to lower our prices, which could reduce our profitability.

Increased imports of steel products into the United States and Canada could negatively affect demand for our products and adversely impact our business and profitability.

We compete against imported steel products in our markets, and new domestic or international competitors could enter our geographic and product markets. Our foreign competitors may have lower labor and raw material costs, lower environmental and other standards, and some are owned, controlled and/or subsidized by their governments, which allows their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. These factors and significant global overcapacity in recent years have led to high levels of steel imports. Increases in levels of imported steel products to the United States and Canada could reduce future market prices and negatively affect demand for our products, which would adversely impact our business, results of operations and financial condition.

Trade cases, tariffs, quotas, revisions to trading regimes or other systems of regulation could have adverse and unintended consequences within the steel pipe and tube industry or our target end markets.

There is no assurance that the ongoing implementation of trade sanctions against unfairly traded steel in connection with Section 232 or other duties on imports of certain steel products will be continued in the future or that they will not have unintended consequences. If these sanctions and other duties are delayed, reduced or rescinded, or significant exemptions are granted, imports of steel products may continue to increase or remain at high levels and continue to create competitive and pricing challenges for our business. We are also unable to predict how other countries will respond to the recent actions under Section 232 or future trade actions or the effects that any retaliatory actions might have on market conditions within both the steel and steel pipe and tube industries, our target end markets and in the North American economy generally. In addition to these trade sanction and duty issues, there is uncertainty about certain bilateral or multi-lateral trade agreements and treaties upon which we rely, particularly the North American Free Trade Agreement (“NAFTA”). Despite recent negotiations, it remains unclear whether significant changes will be made to NAFTA, it will be replaced or even terminated. If NAFTA is revised or replaced in a manner that restricts trade between the United States and Canada, or is terminated entirely, our business could be adversely affected. Given the

 

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ongoing and developing nature of these issues, we cannot provide any assurance as to the ultimate impact to our business.

We generally do not obtain long-term volume purchase commitments from customers and, therefore, cancellations, reductions in production quantities and delays in production by our customers could reduce our operating results and cash flows.

We generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel, reduce or delay their orders for various reasons, including planned changes in their inventory levels. Order cancellations, reductions or delays by a significant customer or by a group of customers have harmed and could continue to harm our operating results and cash flows. In addition, we make significant decisions, including determinations regarding the level of business we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers’ commitments and the likelihood of rapid changes in demand for their products impair our ability to estimate our future customer requirements accurately. As a consequence of the above factors, many of which are beyond our control and difficult to predict, our ability to plan is limited and our operating results and cash flows may vary significantly from our expectations.

Our customers are increasingly looking to rely on a smaller number of suppliers to meet their product needs. If we are not able to provide them with a particular product, they may transfer their purchases to one of our competitors.

We sell our products primarily through distributors. The distribution channels for our products have experienced, and are continuing to experience, extensive consolidation. One of the results of this consolidation is that many distributors prefer to source multiple products from a more limited number of suppliers. Based on the range of products we currently produce, our customers may need to go to multiple sources to obtain all of their product needs. If our customers are able to locate a supplier with a broader product offering, they may choose to purchase some or all of their product needs from that supplier rather than from us, which could adversely affect our business, results of operations and financial condition. In addition, we may need to make significant investments to continue to broaden our product offerings and remain competitive if the market continues to consolidate or to otherwise meet customer demands, and there can be no assurance such investments would be successful.

The non-residential construction industry is cyclical and affects market conditions for our products.

Many of our products are used in non-residential construction and, therefore, our net sales and earnings are strongly influenced by non-residential construction activity, which historically has been cyclical. In the past, a slow-growth economic environment has affected the non-residential construction industry and, therefore, has caused a decline in the demand for our products. A return to a slow-growth or recessionary environment, or a decline or stagnation of growth in non-residential construction activity, would adversely affect our business.

We face risks related to our suppliers, including cost increases and a reliance on steel made in the United States, which may adversely affect our profitability and our business.

We may face supply cost increases due to, among other things, increases in the cost of raw materials or transportation. Our inability to pass the cost increases on to our customers could have a material adverse effect on our business, results of operations and financial condition. If supply costs increase, our customers may elect to purchase smaller amounts of products or may purchase products from our domestic or foreign competitors. In addition, to the extent that competition leads to reduced purchases of products from us or a reduction of our prices, and such reductions occur concurrently

 

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with increases in the prices for selected raw materials which we use in our operations, including steel, the adverse effects described above would likely be exacerbated and could result in a prolonged downturn in profitability.

We purchase most of our steel from a limited number of steel suppliers. Termination of one or more of our relationships with any of these major suppliers could have a negative effect on our business if we were unable to obtain steel at comparable prices from other sources in a timely manner or at all.

The number of available steel suppliers could be reduced in the future by industry consolidation or bankruptcies. A smaller number of suppliers increases the risk of supply disruption due to factors such as mill outages, labor issues, strikes or planned reductions of steel production. We have no long-term supply commitments with our steel suppliers. Interruptions or reductions in our supply of steel could make it difficult to satisfy our customers’ delivery requirements for our products. Much of the steel we purchase is made in the United States. Our heavy reliance on United States steel suppliers may adversely affect our business, results of operations and financial condition if our United States steel supply is disrupted or becomes subject to cost increases.

The loss of third party transportation providers upon whom we depend, or conditions negatively affecting the transportation industry, could increase our costs or cause a disruption in our operations.

We depend upon third party transportation providers for delivery of products to our customers. Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry including, but not limited to, shortages of truck drivers, disruptions in rail service, increases in fuel prices, adverse weather conditions and traffic delays at the United States or Canadian borders could increase our costs and disrupt our operations and our ability to service our customers on a timely basis.

We may not be able to accurately forecast demand for our products.

We order raw materials and supplies and plan production based on discussions with our customers and internal forecasts of demand. If we are unable to accurately forecast demand for our products, in terms of both overall volume and specific products, we may experience delayed product shipments and customer dissatisfaction which could have an adverse impact on our business, results of operations and financial condition.

Changes in our customer and product mix could cause our gross margin percentage to fluctuate.

From time to time, we may experience changes in our customer mix and in our product mix. Changes in our customer mix may result from geographic expansion, daily selling activities within current geographic markets and targeted selling activities to new customer segments. Changes in our product mix may result from marketing activities to existing customers and needs communicated to us from existing and prospective customers. If customers begin to require more lower-margin products from us and fewer higher-margin products, our business, results of operations and financial condition may be adversely affected.

We may be unable to successfully execute or effectively integrate strategic acquisitions.

We selectively pursue strategic acquisitions, which may involve numerous risks and uncertainties, including competition for suitable acquisition targets, the potential unavailability or unfavorable terms of debt, equity or other financing sources necessary to consummate an acquisition and increased

 

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financial leverage due to the additional debt financing that may be required to complete an acquisition. Upon completion of an acquisition, the integration of newly acquired entities may involve significant difficulties, such as the failure to achieve cost savings or other financial or operating objectives and/or the failure to implement our information systems in a timely and appropriate manner, and may divert management’s attention from the ongoing operations of our business. Additionally, we may face difficulties in integrating and retaining customers. The failure to manage acquisition growth risks could have a material adverse effect on our business, results of operations and financial condition.

We are subject to strict environmental, health and safety laws and regulations that could lead to significant liabilities.

We are subject to a variety of federal, state, local, foreign and provincial environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the air or water, the management, storage and disposal of, or exposure to, hazardous substances and wastes, the responsibility to investigate and clean up contamination, and occupational health and safety. Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits. The failure by us to comply with applicable environmental, health and safety requirements or the release of hazardous materials could result in fines, penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures, including the installation of pollution control equipment or other remedial actions.

Under certain laws and regulations, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), the obligation to investigate and remediate contamination at a facility may be imposed on current and former owners or operators or on persons who may have sent waste to that facility for disposal. Liability under these laws and regulations may be without regard to fault or to the legality of the activities giving rise to the contamination. If we become subject to litigation against us under CERCLA or its state or provincial equivalents, we could incur material costs to investigate and remediate contamination at our current and former facilities. Moreover, we may incur liabilities in connection with environmental conditions currently unknown to us relating to our existing, prior or future sites or operations, or those of predecessor companies whose liabilities we may have assumed or acquired.

In addition, environmental, health and safety laws and regulations applicable to our business and the business of our customers, and the interpretation or enforcement of these laws and regulations, are constantly evolving and it is impossible to predict accurately the effect that changes in these laws and regulations, or their interpretation or enforcement, may have upon our business, results of operations or financial condition. Should environmental laws and regulations, or their interpretation or enforcement, become more stringent, our costs could increase, which may have a material adverse effect on our business, results of operations and financial condition.

We rely upon third parties for our supply of energy resources consumed in the manufacture and transport of our products.

We purchase part of our natural gas and electricity on a spot-market basis. The prices for and availability of electricity and natural gas are subject to volatile market conditions. These market conditions are often affected by political and economic factors beyond our control, such as supply and demand for fuel, greenhouse gas regulation or legislation and imposition of further taxes on energy, any of which could lead to an increase in energy prices. Disruptions in the supply of energy resources could temporarily impair both our and our customers’ ability to manufacture products. Further,

 

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increases in energy costs that cannot be passed on to our customers, or changes in costs relative to energy costs paid by competitors, have adversely affected, and may continue to adversely affect, our profitability. Although we have secured some of our natural gas and electricity under fixed price commitments or long-term contracts with suppliers, future increases in fuel and utility prices, or disruptions in energy supply, may have an adverse effect on our financial position, results of operations and financial condition.

Additionally, our operating costs increase when energy or freight costs rise. During periods of increasing energy and freight costs, we might not be able to fully recover our operating cost increases through price increases without reducing demand for our products. In addition, we are dependent on third party freight carriers, all of which are dependent on fuel, to transport our products. The prices for and availability of electricity, natural gas, oil, diesel fuel and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair our ability to manufacture products for customers and may result in the decline of freight carrier capacity in our geographic markets, or make freight carriers unavailable. Further, increases in energy or freight costs that cannot be passed on to customers, or changes in costs relative to energy and freight costs paid by competitors, has adversely affected, and may continue to adversely affect, our profitability.

We may not have adequate insurance for potential liabilities, including liabilities arising from litigation.

In the ordinary course of business, we have in the past and may in the future become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our operations, products, employees and other matters. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of such businesses. Defects in the products we make could result in death, personal injury, property damage, pollution or damage to equipment and facilities. Actual or claimed defects in the products we make may give rise to claims against us for losses and expose us to claims for damages.

We maintain insurance to cover certain of our potential losses. It is possible, however, that judgments could be rendered against us in cases in which we would be uninsured or beyond the amounts that we currently have reserved or anticipate incurring for such matters. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may not be able to continue to obtain insurance on commercially reasonable terms in the future, and we may incur losses from interruptions of our business that exceed our insurance coverage. Finally, in cases where we maintain insurance coverage, our insurers may raise various objections and exceptions to coverage which could make uncertain the timing and amount of any possible insurance recovery.

We may be subject to personal injury, product liability and environmental claims involving allegedly defective products.

Certain of the products we manufacture are used in potentially hazardous applications that can result in personal injury, product liability and environmental claims. A catastrophic occurrence at a location where our products are used may result in us being named as a defendant in lawsuits asserting potentially large claims and applicable law may render us liable for damages without regard to negligence or fault. There is no assurance that our insurance coverage will be adequate to cover the claims and our insurance does not provide coverage for all liabilities.

 

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Our operations present significant risk of injury or death.

Because of the nature of industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the substantial safety precautions we take. Our operations are subject to regulation by national, state and local agencies responsible for employee health and safety, which have from time to time levied fines against us for certain isolated incidents. While such fines have not been material and we have in place policies designed to minimize such risks and certain insurance policies to help avoid material adverse costs, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future, and any such incidents may materially adversely impact our reputation.

We may face risks related to labor shortages, labor costs and collective bargaining agreements, which may negatively impact our business, results of operations and financial condition.

Labor shortages and increased labor costs could negatively impact our business. A shortage of skilled labor or qualified sales personnel could pose a risk to achieving optimal labor productivity and competitive costs, which could adversely affect our profitability. In the event that we experience a shortage of skilled labor or qualified sales personnel or we are unable to train the necessary number of skilled laborers, there could be an adverse impact on our labor productivity and costs and our ability to expand production which could have a material adverse effect on our business, results of operations and financial condition.

In addition, a substantial portion of our work force is covered by collective bargaining agreements. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike, work stoppage or other slowdown. A strike, work stoppage or other slowdown by the employees covered by one or more of the collective bargaining agreements could have a material adverse effect on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. Failure to renew or reach acceptable new collective bargaining agreements could result in work stoppages or other labor disruptions, which could adversely affect our business, results of operations and financial condition.

If we lose any of our key personnel, we may be unable to effectively manage our business or continue our growth.

Our future performance depends to a significant degree upon the continued contributions of our management team, particularly our executive leadership team, and our ability to attract, hire, train and retain qualified managerial personnel. The loss or unavailability to us of any member of our management team could have a material adverse effect on our business, results of operations and financial condition to the extent we are unable to timely find an adequate replacement. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. We may be unsuccessful in attracting, hiring, training and retaining qualified personnel, and our business, results of operations and financial condition could be materially and adversely affected under such circumstances.

Our products have a limited marketing area due to the cost of product transportation.

Our products have limited geographic markets, which may adversely affect our ability to grow our net sales. Because of the size and weight of steel pipe and tubing and the resulting costs of transportation and price competition, it is generally not cost effective for us to ship these products beyond a certain distance. Combined with customers’ short lead-time requirements, this limits the market for our products and our ability to grow net sales and exposes us to risks associated with economic and end market conditions in those areas. If the geographic markets we serve experience

 

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economic challenges, or concentration of end market industries migrates away from those areas, our business could be adversely affected and we could be required to make significant investments to attempt to reach new markets.

We are subject to business interruptions that may materially adversely affect our business.

Our operations may be materially adversely affected by events such as explosions, fires, natural disasters, inclement weather, accidents, equipment failures, information technology systems and process failures, electrical blackouts or outages, transportation interruptions and supply interruptions. Our manufacturing processes depend on production mills and related equipment, which are occasionally out of service as a result of mechanical failures. We may experience extended plant shutdowns or periods of reduced production as a result of equipment failures. Interruptions in our production capabilities will increase production costs and reduce our net sales and earnings. Furthermore, any interruption in production capability may require us to make capital expenditures to remedy the situation, which could have a negative effect on our cash flows. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, loss of energy, explosions, natural disasters and adverse weather conditions. Any of these events may interfere with our ability to produce or ship our products and our business, results of operations and financial condition could be materially and adversely affected.

We face risks associated with our information technology and cybersecurity threats.

We rely on information technology systems in all aspects of our business, including manufacturing and transportation of our products, management of supplier and customer relationships and various corporate, human resources and finance functions. We also collect and store sensitive data, and our suppliers and other service providers may also collect and store sensitive data about us. As a result, we face risks of technology failures, cyberattacks and other vulnerabilities. Cybersecurity threats have increased in number and sophistication. We may need to incur significant costs to maintain the reliability and security of our systems and data, and there can be no assurance we will be successful. If we experience a failure or interruption in the functioning of our information technology systems, whether due to technology or infrastructure failure, natural disaster, cyberattack or otherwise, we could be unable to meet our customer requirements and our reputation, results of operation and financial condition could be adversely affected. Furthermore, if we suffer a loss of or unauthorized access to sensitive data, whether through cyberattack or other breach or failure of our systems, we could face regulatory actions and litigation costs, as well as reputational damage, and our business, results of operations and financial condition could be adversely affected.

International markets expose us to certain risks.

We conduct operations outside of the United States. For the LTM Period, international sales represented approximately 14% of our net sales, the majority of which was generated in Canada. These international operations expose us to certain risks, including:

 

   

local economic conditions;

 

   

inflation;

 

   

changes in or interpretations of foreign regulations;

 

   

exposure to currency fluctuations;

 

   

the status of trade agreements and potential imposition of trade or foreign exchange restrictions or increased tariffs;

 

   

changes and limits in export and import controls;

 

   

difficulty in staffing, developing and managing foreign operations;

 

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potentially longer payment cycles;

 

   

national and regional labor strikes;

 

   

increased costs in maintaining international manufacturing and marketing efforts; and

 

   

changes in taxation.

These risks could have a material adverse effect on our business, results of operations and financial condition.

We are subject to currency fluctuations from our international sales, which can negatively impact our reported earnings.

We sell our products in Canada and other countries around the world. Approximately 14% of our LTM Period net sales were generated by export demand or foreign markets and were often denominated in foreign currencies, mainly the Canadian dollar. Because our financial statements are denominated in U.S. dollars, fluctuations in currency exchange rates between the U.S. dollar and the Canadian dollar have and will continue to have an impact on our reported earnings. If the U.S. dollar weakens or strengthens versus the Canadian dollar, the result will be an increase or decrease in our reported net sales and earnings, respectively. Currency fluctuations have affected our financial performance in the past and may affect our financial performance in any given period.

We also face risks arising from the imposition of foreign exchange controls and currency devaluations, and these actions could have a material adverse effect on our results of operations and financial condition in any given period.

Our international operations require us to comply with anti-corruption laws and regulations of the United States government and various international jurisdictions in which we do business, and violations of these laws and regulations could materially adversely affect our reputation, business, financial condition and results of operations.

Doing business on an international basis requires us, our subsidiaries, and our joint ventures to comply with the laws and regulations of the United States government and various international jurisdictions, and the failure to successfully comply with these rules and regulations may expose us and our subsidiaries to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act (“FCPA”). The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires us to maintain adequate record-keeping and internal accounting practices to accurately reflect our transactions.

As part of our business, we and our subsidiaries may deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. In addition, some of our international operations may be subject to legal and regulatory regimes that differ from those in the United States. We maintain policies and procedures designed to assist us and our subsidiaries and our respective employees in complying with our code of conduct and applicable laws and regulations. However, we cannot assure you that our policies and procedures have been or will be effective to prevent us, our subsidiaries or our respective employees from violating any laws and regulations.

We are exposed to the risk and consequences of violations of anti-corruption laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties,

 

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disgorgement of profits, injunctions and/or debarment from government contracts as well as other remedial measures, and could materially adversely affect our reputation, business, financial condition and results of operations.

We may need additional capital in the future and it may not be available on acceptable terms.

We may require more capital in the future to:

 

   

fund our operations, including working capital requirements;

 

   

finance investments in equipment and infrastructure needed to maintain and expand our manufacturing capabilities;

 

   

enhance and expand the range of products we offer; and

 

   

respond to potential strategic opportunities, such as investments, acquisitions and international expansion.

We cannot assure you that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, restrictions imposed upon us by our financing sources or the failure to obtain additional financing could reduce our competitiveness.

If we were to lose order volumes from any of our largest customers, our sales volumes, net sales and cash flows would be reduced.

Our business is exposed to risks related to customer concentration. Our ten largest customers accounted for approximately 31% of our tons sold and 26% of our total net sales for the LTM Period. Although no individual customer accounted for more than 9% of our tons sold or 8% of our total net sales for the LTM Period, a significant downturn in the business or financial condition of one or more of our significant customers exposes us to the risk of default on contractual agreements and trade receivables. If we are unable to successfully maintain our sales relationships with our customers on terms as favorable as our existing relationships, or a material deterioration in or termination of these customer relationships occurs, and if we are not successful in replacing business lost from such customers, our business, results of operations and financial condition could be materially and adversely affected.

We are incurring and will continue to incur facility carrying costs when production capacity is temporarily idled and we face increased costs and other risks as we resume production at idled facilities.

In the past we have idled production facilities in response to economic conditions and customer demand. From the date of idling the facilities through the restart date (if applicable), we have continued to incur certain facility carrying costs which could not be eliminated even though the facilities were idled, resulting in overall higher per-unit production costs. Furthermore, in the past we have transferred raw materials to operating locations and delayed discretionary repair and maintenance and other expenditures at facilities that have been idled to minimize costs and preserve liquidity during the idling period. As we restart previously idled manufacturing facilities, as we have recently done in Blytheville, Arkansas, and are considering doing at our Mill Street facility in Sharon, Pennsylvania, we incur increased costs to replenish raw material inventories, prepare the previously idled facilities for operation, perform the required repair and maintenance, complete capital projects and prepare employees to return to work and safely resume production responsibilities. We also face risks in restarting facilities related to the availability of labor, the condition of previously idled equipment and

 

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the potential for unanticipated events that could create additional costs or delays. When we idle or restart a facility, we may also make other investments to other facilities to optimize and rationalize our production mix across our facilities and markets. Decisions to restart and optimize facilities are based on various assumptions about future market conditions and demand, and there can be no assurance that these assumptions will prove accurate and that investments in restarting and optimizing facilities will be successful.

We face risks associated with construction and production optimization and modernization activities.

As described in “Business—Growth Strategy,” we are planning or considering various construction and other investments to our facilities to grow and optimize and modernize capacity. There are risks and uncertainties inherent in these activities, such as delays, cost overruns, accidents and regulatory and permitting issues, so there can be no assurance that these activities will be successful or that they will not adversely affect our results of operations or financial condition. In addition, even when these activities are completed as planned, it may take a significant amount of time for the new production capacity to be fully operational. If the market conditions change in unanticipated ways or we overestimate end-user demand, we may not be able to realize the potential benefits of these activities or achieve a satisfactory return on our investments.

Disruptions in the financial markets could have adverse effects on us, our customers and our suppliers, as access to liquidity may be negatively impacted by disruptions in the credit markets, leading to increased funding costs or unavailability of credit.

In the normal course of our business, we access credit markets for general corporate purposes, which may include repayment of indebtedness, acquisitions, additions to working capital, capital expenditures and investments in our subsidiaries. Although we believe we have sufficient liquidity to meet our current needs, our access to and the cost of capital could be negatively impacted by disruptions in the credit markets. In the past, global credit markets have experienced significant dislocations and liquidity disruptions, and uncertainty in the credit markets may make financing terms for borrowers unattractive or unavailable. These factors may make it more difficult or expensive for us to access credit markets to meet our needs. In addition, these factors may make it more difficult for our suppliers to meet demand for their products or for prospective customers to commence new projects, as customers and suppliers may experience increased costs of debt financing or difficulties in obtaining debt financing. Past disruptions in the financial markets have had adverse effects on other areas of the economy and have led to slowdowns in general economic activity that have negatively affected our businesses. These disruptions may have other unknown adverse effects. Based on these conditions, our profitability and our ability to execute our business strategy may be adversely affected.

We have significant obligations under our employee defined benefit plans and may be required to make plan contributions in excess of current estimates.

There is a significant unfunded liability related to our employee defined benefit plans. See “Note 13—Benefit Plans” to our consolidated annual financial statements included in this prospectus for additional information with respect to these plans and their funded status. Significant changes to the assets and/or the liabilities related to these obligations as a result of changes in actuarial estimates, asset performance, interest rates or benefit changes, among other factors, could have a material impact on our financial condition and results of operations. In addition, the amounts and timing of the contributions we expect to make to our defined benefit plans reflect a number of actuarial and other estimates and assumptions with respect to our expected plan funding obligations. The actual amounts and timing of our plan contributions will depend upon a number of factors and may change from our current assumptions.

In addition, we may at any time be required to make additional accelerated plan contributions up to the full amount of our unfunded liability under our defined benefit pension plans in the United States

 

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in the event the Pension Benefit Guaranty Corporation (“PBGC”) institutes proceedings to terminate the plans or in order to prevent the PBGC from doing so. The PBGC may institute proceedings to terminate a defined benefit pension plan for a number of reasons, including if it determines that a plan will be unable to pay benefits when due or if the possible long-run loss to the PBGC with respect to a plan may reasonably be expected to increase unreasonably if the plan is not terminated.

Our financial condition may be adversely affected to the extent that we are required to make any additional contributions to any of our defined benefit pension plans in excess of our assumptions.

At times in the past we have recognized substantial impairment charges, and we may be required to recognize additional impairment charges in the future.

Pursuant to GAAP, we are required to periodically assess the carrying value of our goodwill, other intangible assets and other long-lived assets for impairment. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments.

We believe that our remaining goodwill, other intangible assets and other long-lived asset balances as of June 30, 2018 are properly valued and no additional impairments are believed to exist at this time. However, fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions. Additional impairments could occur in future periods whether or not connected to our annual impairment analyses. Future impairment charges could materially affect our reported earnings in the periods of such charges and could adversely affect our results of operations and financial condition.

Regulations regarding carbon dioxide emissions, and unfavorable allocation of rights to emit carbon dioxide or other air emission related issues, as well as other environmental laws and regulations, could have a material adverse effect on our business, financial condition and results of operations.

Legislative and regulatory efforts to limit or reduce carbon dioxide and other greenhouse gas (“GHG”) emissions could directly or indirectly affect us, our suppliers or our customers. Substantial quantities of GHGs are released as a consequence of our operations. Compliance with regulations governing such emissions tend to become more stringent over time and could lead to a need for us to further reduce such GHG emissions, to purchase rights to emit from third parties, or to make other changes to our business, all of which could result in significant additional costs or could reduce demand for our products. In addition, we are a significant purchaser of energy. Legislation and regulations limiting emissions of GHGs are at various stages of consideration and implementation and, if fully implemented, could negatively impact the market for and costs of our products. Existing and future regulations relating to the emission of carbon dioxide by our energy suppliers could result in materially increased energy costs for our operations, and we may be unable to pass along these increased energy costs to our customers, which could have a material adverse effect on our business, financial condition and results of operations.

A deterioration in our financial condition or a downgrade of our ratings by a credit rating agency could increase our borrowing costs, lead to our inability to access liquidity facilities, and adversely affect our business relationships.

A deterioration in our financial condition or a downgrade of our credit ratings could adversely affect our financing, limit access to the capital or credit markets or our liquidity facilities, or otherwise adversely affect the availability of new financing on favorable terms or at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we incur, increase our borrowing costs, or otherwise impair our business, financial condition and results of operations.

 

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A deterioration in our financial condition or a downgrade of our credit ratings for any reason could also increase our borrowing costs and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. Because financial strength and credit ratings are important to the availability and pricing of hedging and trading activities, any downgrade of our credit ratings or changes to our level of indebtedness may make it more difficult or costly for us to engage in these activities in the future. Our indebtedness could materially adversely affect our ability to invest in or fund our operations, limit our ability to react to changes in the economy or our industry or force us to take alternative measures.

Divestitures and discontinued operations could negatively impact our business, and contingent liabilities from business units that we sell could adversely affect our financial results.

We regularly review our operations for businesses which may no longer be aligned with our strategic initiatives and long-term objectives. In some instances, such as the classification of our EnergeX net assets and operations in Thomasville, Alabama and Welland, Ontario as “held for sale” and discontinued operations, respectively, we may discontinue certain of our operations and incur exit and restructuring costs in connection with such decision.

Divestitures pose risks and challenges that could negatively impact our business. For example, when we decide to sell a business, we may be unable to do so on satisfactory terms and within our anticipated timeframe, and even after reaching a definitive agreement to sell a business, the sale may be subject to satisfaction of pre-closing conditions, which may not be satisfied, as well as regulatory and governmental approvals, which may prevent us from completing a transaction on acceptable terms or at all. In addition, the impact of the divestiture on our net sales and net earnings may be larger than projected, which could distract management, and disputes may arise with buyers.

Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against, contingent liabilities related to businesses sold, such as lawsuits, tax liabilities, product liability claims, pension liabilities, liabilities for other postemployment benefits or environmental matters. Under these types of arrangements, performance by the divested businesses or other conditions outside our control could affect our future financial results.

We are subject to tax filing requirements and audits in multiple jurisdictions, and additional income tax liabilities in excess of current estimates may negatively impact our business, results of operations and financial condition.

We operate within multiple taxing jurisdictions and are subject to tax filing requirements and audits within these jurisdictions. As of June 30, 2018, our U.S. federal tax returns are open to Internal Revenue Service (“IRS”) examination for fiscal years 2015 and 2016. With limited exceptions, we are also open to various state and local income tax examinations for fiscal years 2013 through 2016. In addition to the ongoing audits noted below, as of June 30, 2018, our Canadian federal tax returns are open to Canada Revenue Agency (“CRA”) examination for fiscal years 2015 through 2017.

During fiscal year 2013, the CRA International Audit section commenced an audit of our fiscal years 2009 through 2011. During fiscal year 2014, the CRA commenced a full scope audit of our fiscal years 2011 and 2012. Certain parts of their full scope audit were completed during fiscal years 2016 and 2017, while other aspects are ongoing. In fiscal year 2017, the CRA commenced a full scope audit of our fiscal years 2013 and 2014. We are unable to predict the potential range of tax impacts at this time.

We establish contingent liabilities for possible assessments by taxing authorities resulting from uncertain tax positions including, but not limited to, deductibility of certain expenses and other state and local tax matters. Tax examinations are often complex, as tax authorities may disagree with the

 

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treatment of items reported by us and may require several years to resolve. These accrued liabilities represent provisions for taxes that are reasonably expected to be incurred on the basis of available information but which are not certain. However, we may be assessed tax liabilities in excess of our current estimates, which may negatively impact our business, results of operations and financial condition.

In the United States, the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law on December 22, 2017. We are still in process of evaluating the income tax effect of certain provisions included in the Tax Reform. As of June 30, 2018, we have reflected the impact of the Tax Reform on our results for the first nine months of fiscal year 2018 based on certain assumptions and the best available information, including making a provisional adjustment to our net deferred tax liability based on the new lower income tax rates and recognizing a provisional amount for the mandatory repatriation tax liability imposed under the Tax Reform. The final impact of the Tax Reform may differ from current estimates due to the issuance of technical corrections and additional interpretive guidance, changes in assumptions made by us, and actions we may take as a result of the Tax Reform.

We may not be able to successfully develop and implement new technology initiatives and other strategic investments in a timely manner.

We have invested in, and are involved with, a number of technology and process initiatives. Being at the forefront of technological development is important to remain competitive. Even if we are successful in implementing future technological development initiatives, we may not be able to bring them to market as planned before our competitors or at all, and the initiatives may end up costing more than expected. As a result, the costs and benefits from our investments in new technologies and the impact on our financial results may vary from present expectations.

Our inability to sufficiently or completely protect our intellectual property rights could adversely affect our business, prospects, financial condition and results of operations.

Our ability to compete effectively will depend on our ability to maintain the proprietary nature of the intellectual property used in our businesses. These intellectual property rights consist largely of trade-secrets and know-how. We rely on a combination of trade secrets and non-disclosure and other contractual agreements and technical measures to protect our rights in our intellectual property. We also depend upon confidentiality agreements with our officers, directors, employees, consultants and subcontractors, as well as collaborative partners, to maintain the proprietary nature of our intellectual property. These measures may not afford us sufficient or complete protection, and others may independently develop intellectual property similar to ours, otherwise avoid our confidentiality agreements or produce technology that would adversely affect our business, prospects, financial condition and results of operations.

Risks Related to Our Indebtedness

Our indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

As of June 30, 2018, we had $1.3 billion of total indebtedness on a consolidated basis (excluding $10.3 million of letters of credit). In addition, we had $344.7 million of borrowing capacity available under our Senior Secured Revolving Credit Facility (the “Revolving Credit Facility”) (after giving effect to letters of credit). On a pro forma as adjusted basis giving effect to this offering and the application of the net proceeds thereof as described in “Use of Proceeds” and “Capitalization,” our total indebtedness on a consolidated basis as of June 30, 2018 would have been $849.8 million.

 

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Our indebtedness could:

 

   

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;

 

   

require us to dedicate a substantial portion of our annual cash flow for the next several years to the payment of interest on the indebtedness;

 

   

expose us to the risk of increased interest rates (as over the term of our debt, the interest cost on a significant portion of our indebtedness is subject to changes in interest rates);

 

   

place us at a competitive disadvantage compared to certain of our competitors who have less debt;

 

   

hinder our ability to adjust rapidly to changing market conditions;

 

   

limit our ability to secure adequate bank financing in the future with reasonable terms and conditions;

 

   

increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions impacting one or more of our businesses; and

 

   

limit our ability to pay dividends.

In addition, the agreements governing our 9.875% Senior Secured Notes due 2023 (the “Senior Secured Notes”), Term Loan Facility and Revolving Credit Facility contain affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

Despite current indebtedness levels and restrictive covenants, we and our subsidiaries may incur additional indebtedness in the future. This could further exacerbate the risks associated with our substantial financial leverage.

The terms of the agreements governing our Senior Secured Notes, Term Loan Facility and Revolving Credit Facility will permit us to incur a substantial amount of additional debt, including secured debt. If new debt is added to our current debt levels, the risks that we now face as a result of our leverage would intensify.

To service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control. Our ability to refinance our indebtedness, should the need arise, also depends on many factors beyond our control.

Our ability to make cash payments on and to refinance our indebtedness, and to fund planned capital expenditures, will depend on our ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Our business may not generate sufficient cash flows from operating activities and future borrowings may not be available under our existing debt arrangements in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The agreements governing our Senior Secured Notes, Term Loan Facility and Revolving Credit Facility will restrict our ability to sell assets and use the proceeds from such sales.

 

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If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of our indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from our lenders to avoid being in default. If we breach our covenants under our debt arrangements and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Borrowing availability under our Revolving Credit Facility is subject to a borrowing base limitation that fluctuates from time to time and is subject to redetermination.

Our availability under our Revolving Credit Facility could decline if the value of our borrowing base (which is calculated based on a percentage of our eligible inventory and accounts receivable) declines, the administrative agent imposes reserves in its discretion, our borrowings under the Revolving Credit Facility increase or for other reasons. The value of our borrowing base could decline if the value of our eligible inventory or accounts receivable declines due to economic or market conditions, due to working capital practices or for other reasons. If our borrowing availability is less than our outstanding borrowings under the facility, we would be required to repay borrowings and/or cash collateralize letters of credit sufficient to eliminate the deficit.

Risks Related to the Offering and Ownership of Our Class A Subordinate Voting Stock

The multiple class structure to be contained in our amended and restated certificate of incorporation will have the effect of concentrating voting control with members of the Zekelman family and limiting your ability to influence corporate matters.

Our Class B multiple voting stock has ten votes per share and our Class A subordinate voting stock has one vote per share. Entities controlled by members of the Zekelman family, including our Executive Chairman and CEO, Barry Zekelman, and our directors Alan Zekelman and Clayton Zekelman, through ownership of shares of Class B multiple voting stock and Special Voting Shares, will together hold approximately 97% of the voting power of our outstanding capital stock following this offering. In addition, members of the Zekelman family will have certain director nomination rights as described under “Certain Relationships and Related Party Transactions—Stockholders Agreement.” Therefore, members of the Zekelman family will have significant influence over our management and affairs and over all matters requiring stockholder approval, including election of directors and significant corporate transactions, for the foreseeable future.

In addition, because of the 10-to-1 voting ratio between our Class B multiple voting stock and Class A subordinate voting stock, the holders of Class B multiple voting stock and Special Voting Shares collectively will continue to be able to control all matters submitted to our stockholders for approval even if their stock holdings represent substantially less than 50% of the outstanding shares of our common stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A subordinate voting stock could be adversely affected.

As directors, members of the Zekelman family owe fiduciary duties to our stockholders and must act in good faith in a manner they reasonably believe to be in the best interests of our stockholders. As

 

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stockholders, irrespective of their controlling stockholder status, members of the Zekelman family are entitled to vote their shares in their own interests, which may differ from or conflict with the interests of our other stockholders. We cannot anticipate in what form such differing or conflicting interests may arise, and so long as these principal stockholders continue to own a significant amount of our outstanding capital stock, they will continue to have the ability to strongly influence or effectively control our decisions.

Future transfers by holders of Class B multiple voting stock, other than permitted transfers to or among Zekelman family members and entities they control or to other permitted holders, will result in those shares converting to Class A subordinate voting stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B multiple voting stock who retain their Class B multiple voting stock. See “Description of Capital Stock—Class A Subordinate Voting Stock and Class B Multiple Voting Stock—Conversion of Class B Multiple Voting Stock.”

There has been no prior market for our Class A subordinate voting stock. An active market may not develop or be sustainable and investors may not be able to resell their shares at or above the initial public offering price.

Neither the NYSE nor the Toronto Stock Exchange has conditionally approved the listing application of our Class A subordinate voting stock and there is no assurance that either or both of the NYSE or the Toronto Stock Exchange will do so. There has been no public market for our Class A subordinate voting stock prior to this offering. The initial public offering price for our Class A subordinate voting stock will be determined through negotiations between the underwriters, the selling stockholders and us and may vary from the market price of our Class A subordinate voting stock following this offering. If you purchase shares of our Class A subordinate voting stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our Class A subordinate voting stock may not develop after this offering or, if it does develop, it may not be sustainable.

Our stock price may be volatile, and you may be unable to sell your shares of Class A subordinate voting stock at or above the initial public offering price, if at all.

The initial public offering price for the shares of our Class A subordinate voting stock will be determined through negotiations between us, the selling stockholders and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our Class A subordinate voting stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

   

actual or anticipated fluctuations in our financial condition and operating results or those of similar companies;

 

   

changes in our projected operational and financial results or those of similar companies;

 

   

changes in laws or regulations applicable to us or our industry;

 

   

the commencement or conclusion of legal proceedings that involve us;

 

   

actual or anticipated changes in our growth rate relative to our competitors;

 

   

announcements of new products or services by us or our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

   

additions or departures of key personnel;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

the use by investors or analysts of third party data regarding our business that may not reflect our financial performance;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

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sales of our Class A subordinate voting stock;

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

investor response to our multiple class structure;

 

   

the expiration of contractual lock-up agreements; and

 

   

general economic and market conditions.

Furthermore, the stock markets frequently experience extreme price and volume fluctuations that affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, elections, interest rate changes or international currency fluctuations, may negatively impact the market price of our Class A subordinate voting stock. If the market price of our Class A subordinate voting stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

Our management has broad discretion to spend the proceeds from this offering and you may not agree with the way the proceeds are spent. The failure of our management to apply these proceeds effectively could result in unfavorable returns. This could adversely affect our business, causing the price of our Class A subordinate voting stock to decline.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our Class A subordinate voting stock is substantially higher than the net tangible book value per share of our Class A subordinate voting stock. Therefore, if you purchase our Class A subordinate voting stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our Class A subordinate voting stock and the net tangible book value per share of our Class A subordinate voting stock after this offering. See “Dilution.”

Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We may issue additional securities following the closing of this offering. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell Class A subordinate voting stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A subordinate voting stock.

 

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If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

Equity research analysts do not currently provide research coverage of our Class A subordinate voting stock, and we cannot assure you that any equity research analysts will adequately provide research coverage of our Class A subordinate voting stock after this offering. A lack of adequate research coverage may adversely affect the liquidity and market price of our Class A subordinate voting stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The price of our Class A subordinate voting stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Substantial future sales of shares of our Class A subordinate voting stock could cause the market price of our Class A subordinate voting stock to decline.

Sales of a substantial number of shares of our Class A subordinate voting stock in the public market following the closing of this offering, or the perception that these sales might occur, could depress the market price of our Class A subordinate voting stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our Class A subordinate voting stock. See “Shares Eligible for Future Sale.”

In connection with this offering, we and our executive officers, directors and existing stockholders have entered into lock-up agreements that prevent the sale or transfer of shares of our Class A subordinate voting stock for up to 365 days after the date of this prospectus, subject to waiver by Goldman Sachs & Co. LLC and customary exceptions. In addition, our option holders that are selling stockholders in this offering have agreed to additional restrictions on the exercise of their remaining options and the sale of the underlying shares. Members of the Zekelman family who hold all of our outstanding shares prior to this offering will enter into a registration rights agreement with us that will confer upon such holders the right, subject to certain conditions, to require us to register the sale of their shares under the federal securities laws following the expiration of the 365-day lock-up period. If this right is exercised, holders of all shares subject to a registration rights agreement will be entitled to participate in such registration. By exercising their registration rights, and selling a large number of shares, these holders could cause the prevailing market price of our Class A subordinate voting stock to decline. See “Shares Eligible For Future Sale—Registration Rights” and “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

We will be a “controlled company” within the meaning of the rules of the NYSE, and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon the completion of this offering, members of the Zekelman family will continue to control a majority of the voting power of our outstanding capital stock. As a result, we will be a “controlled company” under the corporate governance listing standards of the NYSE. As a controlled company, we are exempt from the obligation to comply with certain corporate governance requirements, including the requirements:

 

   

that our Board of Directors consists of a majority of independent directors;

 

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that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements, which could make our Class A subordinate voting stock less attractive to investors or otherwise harm our stock price.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may harm our business.

We have historically operated as a private company and have not been subject to the same financial and other reporting and corporate governance requirements as a public company. After this offering, we will be required to file annual, quarterly and other reports with the U.S. Securities and Exchange Commission (“SEC”). We will need to prepare and timely file financial statements that comply with SEC reporting requirements. We will also be subject to other reporting and corporate governance requirements under the listing standards of the NYSE, the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will impose significant compliance costs and obligations upon us. The changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight, which will increase our operating costs. These changes will also place significant additional demands on our finance and accounting staff, which may not have prior public company experience or experience working for a newly public company, and on our financial accounting and information systems, and we may need to, in the future, hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:

 

   

prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and the NYSE rules;

 

   

define and expand the roles and the duties of our Board of Directors and its committees;

 

   

institute more comprehensive compliance, investor relations and internal audit functions; and

 

   

evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with rules and regulations of the SEC and the Public Company Accounting Oversight Board.

In particular, as a public company, the Sarbanes-Oxley Act will require us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework, and to report on our conclusions as to the effectiveness of our internal controls. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. In addition, we will be required under the Securities Exchange Act of 1934 (“Exchange Act”) to maintain and evaluate the effectiveness of our disclosure controls and procedures. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial

 

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reporting, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our Class A subordinate voting stock. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.

We may not continue to pay anticipated dividends on our Class A subordinate voting stock.

As described under “Dividend Policy,” we expect that we will pay quarterly cash dividends on our Class A subordinate voting stock in an initial amount equal to $0.03 per share (or approximately $22.0 million annually in the aggregate inclusive of dividends payable to our Class B multiple voting stock and Exchangeable Shares). However, there is no assurance that this initial dividend amount will be sustained or that we will continue to pay dividends in the future. Any future determination to pay dividends, and the timing and amount thereof, will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Under our debt agreements, we are restricted from paying cash dividends or making other restricted payments over certain amounts as computed and defined in our agreements, and we expect these restrictions to continue in the future. Although these restrictions will not prohibit the payment of dividends initially following this offering as described above, they may in the future. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, if you purchase shares in this offering, realization of a gain on your investment may depend solely on the appreciation of the price of our Class A subordinate voting stock, which may never occur.

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management or hinder efforts to acquire a controlling interest in us, and the market price of our Class A subordinate voting stock may be lower as a result.

There are provisions in our amended and restated certificate of incorporation and bylaws, as they will be in effect following this offering, that may make it difficult for a third party to acquire, or attempt to acquire, control of us. These provisions are in addition to the effects of the multiple class structure and the concentrated control by the Zekelman family described above and include provisions that:

 

   

authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan;

 

   

permit the Board of Directors to establish the number of directors and fill any vacancies and newly created directorships;

 

   

on and after the Automatic Conversion Date, classify our Board of Directors into three separate classes with three-year staggered terms;

 

   

on and after the Automatic Conversion Date, prohibit stockholders from acting by written consent or calling special meetings; and

 

   

on and after the Automatic Conversion Date, require super-majority voting to amend certain provisions in our amended and restated certificate of incorporation and our bylaws.

Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. We will elect in our amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law. However, our amended and restated certificate of incorporation will contain provisions that have the same effect as Section 203, except that they will provide that members of the

 

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Zekelman family and their respective affiliates will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.

Our amended and restated bylaws will contain exclusive forum provisions that could limit our stockholders’ ability to choose a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated bylaws will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (3) any action asserting a claim against the company or any director or officer of the company arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws, or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court’s having subject matter jurisdiction and jurisdiction over indispensable parties named as defendants. Our amended and restated bylaws will also provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”). These exclusive forum provisions may limit stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes “forward-looking statements” that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, our proposed use of proceeds of this offering, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although it is not possible to identify all risks, uncertainties and other factors that may impact forward-looking statements, they include, but are not limited, to those described in “Risk Factors” and elsewhere in this prospectus and the following:

 

   

the effects of general economic conditions and conditions in the non-residential construction, infrastructure and other industries that we serve on demand for our products;

 

   

our ability to effectively respond to changes in steel prices;

 

   

competitive conditions in our industry;

 

   

the effects of current and future United States, Canadian and foreign trade and tariff actions;

 

   

levels of imports of steel products into the United States and Canada;

 

   

our ability to anticipate and successfully respond to our customers’ evolving requirements and preferences;

 

   

our ability to obtain key supplies and services, such as steel, transportation and energy, on favorable terms;

 

   

our ability to successfully acquire and integrate businesses;

 

   

our ability to successfully develop and implement new technology initiatives and other strategic endeavors;

 

   

our ability to successfully complete planned or potential construction and production optimization and modernization activities and to realize the potential benefits thereof;

 

   

our compliance with environmental, health and safety, and other applicable laws and regulations and the effects of changes in those regulations;

 

   

our exposure to potential litigation or regulatory actions;

 

   

our reliance on key managerial personnel;

 

   

the availability and cost of labor and our ability to effectively manage labor relations;

 

   

risks and uncertainties associated with operations in international markets; and

 

   

the effects of financial market conditions on our ability to obtain capital, at all or on acceptable terms.

Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.

 

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Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make in this prospectus speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments, except as required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our Class A subordinate voting stock in this offering will be approximately $468.7 million based upon the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of Class A subordinate voting stock in this offering by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds that we receive from this offering by approximately $26.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our Class A subordinate voting stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $17.1 million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

We intend to use the net proceeds of this offering to repay a portion of our outstanding indebtedness under our Term Loan Facility. The Term Loan Facility has a maturity date of June 14, 2021 and, as of June 30, 2018, an interest rate per annum of 4.6%. As of June 30, 2018, we had $907.1 million of indebtedness outstanding under our Term Loan Facility and $1.3 billion of total indebtedness outstanding (excluding $10.3 million of letters of credit). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Note 10—Long-Term Debt” to our consolidated annual and interim financial statements included in this prospectus.

 

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DIVIDEND POLICY

We paid dividends to our common stockholders and the holder of our Exchangeable Shares in the amount of $30.0 million in the first nine months of fiscal year 2018, and $20.0 million in each of fiscal years 2017, 2016 and 2015. See “Selected Historical Consolidated Financial and Other Data” for information regarding dividends per common share. In connection with these dividends, holders of options pursuant to our Second Amended and Restated Stock Option Plan (the “Option Plan”) were entitled to dividend equivalents of $2.3 million in respect of the dividend paid in the first nine months of fiscal year 2018 and $1.4 million, $1.5 million and $1.5 million in respect of the dividends paid in fiscal years 2017, 2016 and 2015, respectively. These dividend equivalents are only paid when options are vested. As of June 30, 2018, a total of $1.1 million in unpaid dividend equivalents were included in other accrued liabilities or other liabilities (depending on the expected timing of future payouts) on our consolidated balance sheet.

Following this offering, subject to applicable law, we expect that we will pay quarterly cash dividends on our Class A subordinate voting stock in an initial amount equal to $0.03 per share (or approximately $22.0 million annually in the aggregate inclusive of dividends payable to our Class B multiple voting stock and Exchangeable Shares). See “Description of Capital Stock” for further information on the respective rights of our stockholders with respect to any dividends. We expect these dividends would commence in the second quarter of fiscal year 2019. However, there is no assurance that this initial dividend amount will be sustained or that we will continue to pay dividends in the future. Any future determination to pay dividends, and the timing and amount thereof, will be at the discretion of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in our debt agreements and those of our subsidiaries and other factors that our Board of Directors deems relevant. Under our debt agreements, we are restricted from paying cash dividends or making certain other restricted payments, and we expect these restrictions to continue in the future. Although these restrictions will not prohibit the payments of dividends initially following this offering as described above, they may in the future. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. See “Risk Factors—Risks Related to the Offering and Ownership of Our Class A Subordinate Voting Stock—We may not continue to pay anticipated dividends on our Class A subordinate voting stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and consolidated capitalization as of June 30, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the completion of the Reorganization; and

 

   

on a pro forma as adjusted basis to further reflect (i) the receipt of the estimated net proceeds of this offering of approximately $468.7 million, based upon the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the net proceeds of this offering to repay a portion of our outstanding indebtedness under our Term Loan Facility, as described under “Use of Proceeds.”

 

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The pro forma as adjusted information below is illustrative only, and our cash and cash equivalents and consolidated capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table in conjunction with the sections of this prospectus entitled “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    As of June 30, 2018  
  Actual     Pro forma     Pro forma As
Adjusted
 
   

(in millions)

(Unaudited)

 

Cash and cash equivalents

  $ 36.6     $ 36.6     $ 44.5 (1) 
 

 

 

   

 

 

   

 

 

 

Current and long-term debt(2)

  $ 1,314.4     $ 1,314.4     $ 849.8 (3) 
 

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

     

Common stock, $.01 par value—400,000 shares authorized, 164,644 shares issued, 24,040 shares outstanding (actual); no shares authorized or issued and outstanding (pro forma and pro forma as adjusted)

                 

Non-voting common stock, $.01 par value—50,000 shares authorized, 10,000 shares issued, 9,361 shares outstanding (actual); no shares authorized or issued and outstanding (pro forma and pro forma as adjusted)

                 

Preferred stock, $.01 par value—100,000 shares authorized, no shares issued and outstanding (actual); 25,000,000 shares authorized, no shares issued and outstanding (pro forma and pro forma as adjusted)

                 

Special voting stock, $.000001 par value—200,000 shares authorized, 122,652 shares issued and outstanding (actual); 250,000,000 shares authorized, 122,652,000 shares issued and outstanding (pro forma); 250,000,000 shares authorized, 111,511,250 shares issued and outstanding (pro forma as adjusted)

                 

Class A subordinate voting stock, $.01 par value—no shares authorized or issued and outstanding (actual); 1,000,000,000 shares authorized, no shares issued and outstanding (pro forma); 1,000,000,000 shares authorized, 41,750,000 shares issued and outstanding (pro forma as adjusted)

                0.4  

Class B multiple voting stock, $.01 par value—no shares authorized or issued and outstanding (actual); 250,000,000 shares authorized, 33,401,000 shares issued and outstanding (pro forma and pro forma as adjusted)

          0.3       0.3  

Additional paid-in capital

    467.6       52.2       561.5  

Exchangeable shares in subsidiary—122,652 shares issued and outstanding (actual); 122,652,000 shares issued and outstanding (pro forma); 111,511,250 shares issued and outstanding (pro forma as adjusted)(4)

    352.1       352.1       320.1  

Retained earnings

    283.9       283.9       279.8 (3) 

Accumulated other comprehensive loss

    (36.2     (36.2     (36.2

Treasury stock, at cost—141,243 shares (actual); no shares (pro forma and pro forma as adjusted)

    (415.1            
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  $ 652.2     $ 652.2     $ 1,125.9  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 1,966.6     $ 1,966.6     $ 1,975.6  
 

 

 

   

 

 

   

 

 

 

 

(1)

Includes $9.0 million of proceeds from the exercise of 2,859,250 options by selling stockholders in this offering at a weighted average exercise price of $3.16 per share, partially offset by the use of $1.1 million of cash to settle dividend equivalent obligations.

(2)

For a description of indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Note 10—Long-Term Debt” to our consolidated annual and interim financial statements included in this prospectus.

(3)

Includes the write-off of $4.1 million of term loan discount and capitalized deferred financing costs in connection with the repayment of a portion of the outstanding indebtedness under our Term Loan Facility with the net proceeds of this offering.

(4)

See “Description of Capital Stock—Special Voting Shares and Exchangeable Shares.”

 

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DILUTION

If you invest in our Class A subordinate voting stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A subordinate voting stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our Class A subordinate voting stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. We had a negative pro forma net tangible book value as of June 30, 2018 of $454.6 million, or $2.91 per share, based on the total number of shares of our Class A subordinate voting stock and Class B multiple voting stock outstanding as of June 30, 2018, after giving effect to the Reorganization and assuming the exchange of all Exchangeable Shares for shares of Class B multiple voting stock and cancellation without consideration of the corresponding Special Voting Shares.

After giving effect to the sale by us of 27,750,000 shares of our Class A subordinate voting stock in this offering at the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the issuance of 2,859,250 shares of our Class A subordinate voting stock upon exercise of options by selling stockholders and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2018, would have been $19.1 million, or $0.10 per share. This represents an immediate increase in pro forma net tangible book value of $3.01 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $17.90 per share to investors purchasing shares of our Class A subordinate voting stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Initial public offering price per share

     $ 18.00  

Pro forma net tangible book value per share as of June 30, 2018

   $ (2.91  

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of Class A subordinate voting stock in this offering

     3.01    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       0.10  
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $ 17.90  

Each $1.00 increase or decrease in the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.14, and would increase or decrease, as applicable, dilution per share to new investors purchasing shares of our Class A subordinate voting stock in this offering by $0.14, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table presents, as of June 30, 2018, after giving effect to the Reorganization, the differences between the existing stockholders and the new investors purchasing shares of our Class A subordinate voting stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our Class A subordinate voting stock and the average price per share paid or to be paid to us at the assumed initial public offering price of $18.00 per share, which is the midpoint of the estimated offering

 

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price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares purchased     Total consideration     Average
price per
share
 
     Number     Percent     Amount      Percentage  

Existing stockholders

     158,912,250 (1)      85.1   $ 328,840,354        39.7   $ 2.07  

New investors

     27,750,000       14.9   $ 499,500,000        60.3   $ 18.00  
  

 

 

   

 

 

   

 

 

    

 

 

   

Totals

     186,662,250       100   $ 828,340,354        100  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

(1)

Includes 156,053,000 total shares outstanding after giving effect to the Reorganization but prior to the offering, plus 2,859,250 shares to be issued upon exercise of options by selling stockholders in this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our Class A subordinate voting stock from certain selling stockholders.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth selected historical consolidated financial and other data.

The selected consolidated financial information presented below under the captions “Statement of operations data” and “Statement of cash flows data” for the fiscal years ended September 30, 2017, September 24, 2016 and September 26, 2015, and the selected consolidated financial information presented below under the caption “Balance sheet data” as of September 30, 2017 and September 24, 2016, have been derived from our consolidated financial statements that have been audited by Ernst & Young LLP, our independent registered public accounting firm, and are included elsewhere in this prospectus. The selected consolidated financial information presented below under the captions “Statement of operations data” and “Statement of cash flows data” for the fiscal years ended September 27, 2014 and September 28, 2013, and the selected consolidated financial information presented below under the caption “Balance sheet data” as of September 26, 2015, September 27, 2014 and September 28, 2013, have been derived from our audited consolidated financial statements that are not included in this prospectus.

The selected interim consolidated financial information presented below under the captions “Statement of operations data” and “Statement of cash flows data” for the 13 weeks and 39 weeks ended June 30, 2018 and June 24, 2017, and the selected consolidated financial information presented below under the caption “Balance sheet data” as of June 30, 2018 have been derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The selected interim consolidated financial information presented below under the caption “Balance sheet data” as of June 24, 2017 has been derived from our unaudited interim consolidated financial statements that are not included in this prospectus. All selected interim consolidated financial information has been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the interim data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results for these periods and such data has been prepared on the same basis as the audited financial information. Interim results may not be indicative of full year results and historical results may not necessarily be indicative of results that may be expected for any future period.

See “Prospectus Summary—Summary Consolidated Financial and Other Data—Pro Forma Earnings (Loss) per Share Data” and our consolidated financial statements and related notes included elsewhere in this prospectus for pro forma unaudited consolidated earnings (loss) per share information for the 13 weeks and 39 weeks ended June 30, 2018 and June 24, 2017 and the fiscal years ended September 30, 2017, September 24, 2016 and September 26, 2015, reflecting the completion of the Reorganization.

 

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The selected historical consolidated financial data presented below should be read in conjunction with “Prospectus Summary—Summary Consolidated Financial and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    13 Weeks
Ended

June 30,
2018
    13 Weeks
Ended

June 24,
2017
    39 Weeks
Ended

June 30,
2018
    39 Weeks
Ended
June 24,
2017
    Year Ended
September 30,

2017
    Year Ended
September 24,

2016
    Year Ended
September 26,

2015
    Year Ended
September 27,

2014
    Year Ended
September 28,

2013
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                                
    (in thousands, except share and per share amounts)  

Statement of operations data:

                 

Net sales

  $ 783,134     $ 564,226     $ 1,981,735     $ 1,480,901     $ 2,095,255     $ 1,554,491     $ 1,712,547     $ 1,965,989     $ 1,924,556  

Cost of sales

    571,359       446,436       1,508,763       1,156,454       1,657,700       1,200,215       1,466,797       1,676,273       1,649,153  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    211,775       117,790       472,972       324,447       437,555       354,276       245,750       289,716       275,403  

Expenses:

                 

Selling, general and administrative expenses

    51,955       38,291       138,357       107,905       151,317       130,214       123,103       128,250       130,832  

Transaction costs

                      731       731                          

Impairment of goodwill, intangible assets and fixed assets

                                              5,325       10,137  

Exit and restructuring costs

          392       108       1,764       1,873       1,970       8,771       635       3,316  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    51,955       38,683       138,465       110,400       153,921       132,184       131,874       134,210       144,285  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    159,820       79,107       334,507       214,047       283,634       222,092       113,876       155,506       131,118  

Other expense (income), net:

                 

Interest expense, net

    23,049       22,421       65,490       69,045       92,139       95,931       98,511       104,034       103,212  

Other expense (income), net

    3,263       (1,302     7,945       400       (7,141     25,074       14,242       17,187       15,077  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    26,312       21,119       73,435       69,445       84,998       121,005       112,753       121,221       118,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    133,508       57,988       261,072       144,602       198,636       101,087       1,123       34,285       12,829  

Provision (benefit) for income taxes

    33,265       9,964       55,413       24,830       35,340       16,008       (4,637     3,295       7,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    100,243       48,024       205,659       119,772       163,296       85,079       5,760       30,990       5,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations, net of income taxes

    (320     (146     (1,034     209       (1,822     (16,580     (69,430     (26,496     (87,798
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 99,923     $ 47,878     $ 204,625     $ 119,981     $ 161,474     $ 68,499     $ (63,670   $ 4,494     $ (82,286
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders—basic(1)

  $ 14,312     $ 7,102     $ 29,494     $ 17,494     $ 23,487     $ 10,048     $ (9,844   $ 696     $ (17,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders—diluted(1)

  $ 86,237     $ 41,351     $ 176,715     $ 104,738     $ 141,316     $ 59,277     $ (61,073   $ 3,942     $ (80,197
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    13 Weeks
Ended

June 30,
2018
    13 Weeks
Ended

June 24,
2017
    39 Weeks
Ended

June 30,
2018
    39 Weeks
Ended
June 24,
2017
    Year Ended
September 30,

2017
    Year Ended
September 24,

2016
    Year Ended
September 26,

2015
    Year Ended
September 27,

2014
    Year Ended
September 28,

2013
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                                
    (in thousands, except share and per share amounts)  

Earnings (loss) per common share—basic(1):

                 

Continuing operations

  $ 597.25     $ 296.30     $ 1,232.99     $ 726.46     $ 987.94     $ 517.27     $ 35.44     $ 182.45     $ 7.04  

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (10.94     (99.30     (444.92     (156.01     (533.86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 595.34     $ 295.42     $ 1,226.87     $ 727.70     $ 977.00     $ 417.97     $ (409.48   $ 26.44     $ (526.82
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—diluted(1):

                 

Continuing operations

  $ 589.79     $ 282.77     $ 1,210.79     $ 712.76     $ 974.29     $ 503.39     $ 28.59     $ 182.45     $ 7.04  

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (10.94     (99.30     (444.92     (156.01     (533.86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 587.88     $ 281.89     $ 1,204.67     $ 714.00     $ 963.35     $ 404.09     $ (416.33   $ 26.44     $ (526.82
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—basic

    24,040       24,040       24,040       24,040       24,040       24,040       24,040       26,325       32,550  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

    146,692       146,692       146,692       146,692       146,692       146,692       146,692       148,977       156,712  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to non-voting common stockholders—basic and diluted(1)

  $ 4,935     $ 1,489     $ 9,571     $ 5,536     $ 7,870     $ 2,636     $ (5,110   $ 252     $ (4,915
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per non-voting common share—basic and diluted(1):

                 

Continuing operations

  $ 529.10     $ 159.94     $ 1,028.55     $ 590.15     $ 851.66     $ 380.89     $ (100.96   $ 182.45     $ (100.58

Discontinued operations

    (1.91     (0.88     (6.12     1.24       (10.94     (99.30     (444.92     (156.01     (533.86
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 527.19     $ 159.06     $ 1,022.43     $ 591.39     $ 840.72     $ 281.59     $ (545.88   $ 26.44     $ (634.44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average non-voting common shares outstanding—basic and diluted

    9,361       9,361       9,361       9,361       9,361       9,361       9,361       9,507       7,747  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends per weighted average common share

  $ 68.17     $ 136.34     $ 204.51     $ 136.34     $ 136.34     $ 136.34     $ 136.34     $     $ 107.58  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statement of cash flows data:

                 

Net cash provided by operating activities

      $ 100,919     $ 83,541     $ 159,045     $ 174,124     $ 202,607     $ 37,490     $ 32,517  

Net cash used in investing activities

      $ (62,740   $ (225,936   $ (241,217   $ (38,379   $ (47,942   $ (37,353   $ (49,460

Net cash (used in) provided by financing activities

      $ (22,858   $ 135,023     $ 73,878     $ (134,333   $ (147,726   $ 1,543     $ (5,541

Capital expenditures

      $ (60,870   $ (34,045   $ (46,815   $ (38,398   $ (47,114   $ (43,959   $ (51,067

 

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(1)

Following this offering, our Class A subordinate voting stock and Class B multiple voting stock will have identical economic rights and both net income (loss) available to common stockholders and earnings (loss) per common share will be calculated to account for both classes. We expect to no longer present separate line items for two classes of common stock as we have historically. See the summary unaudited consolidated pro forma earnings (loss) per share information in “Prospectus Summary—Summary Consolidated Financial and Other Data—Pro Forma Earnings (Loss) per Share Data.”

 

    June 30,
2018
    June 24,
2017
    September 30,
2017
    September 24,
2016
    September 26,
2015
    September 27,
2014
    September 28,
2013
 
    (unaudited)     (unaudited)                                
    (in thousands)  

Balance sheet data:

             

Cash and cash equivalents

  $ 36,617     $ 27,394     $ 29,201     $ 36,721     $ 35,200     $ 23,478     $ 44,453  

Total assets, including amounts held for sale

  $ 2,455,493     $ 2,249,042     $ 2,284,805     $ 1,957,389     $ 1,980,416     $ 2,370,188     $ 2,365,063  

Operating working capital(1)

  $ 605,891     $ 440,023     $ 447,907     $ 252,389     $ 234,416     $ 378,495     $ 297,016  

Total debt, including current portion

  $ 1,314,422     $ 1,359,640     $ 1,299,338     $ 1,199,483     $ 1,287,581     $ 1,412,898     $ 1,369,251  

Total liabilities, including amounts held for sale

  $ 1,803,276     $ 1,825,551     $ 1,808,505     $ 1,636,687     $ 1,679,018     $ 1,987,051     $ 1,931,237  

Total stockholders’ equity

  $ 652,217     $ 423,491     $ 476,300     $ 320,702     $ 301,398     $ 383,137     $ 433,826  

 

(1)

Operating working capital is a financial metric used by management, calculated as accounts receivable, net, plus inventories, net, less accounts payable.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth under “Special Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus. Unless otherwise noted, all information in this discussion and analysis of our financial condition and results of operations excludes discontinued operations and reflects continuing operations only.

Overview

Zekelman Industries is a leading North American manufacturer of industrial steel pipe and tube products with over 100 years of operating experience. We have 13 pipe and tube production facilities in seven U.S. states and one Canadian province, with total production of approximately 2.1 million tons from our continuing operations for the LTM Period. We offer a broad array of products marketed under a family of respected brands such as Atlas, Wheatland, Sharon Tube, Western Tube & Conduit, Picoma and Z Modular. The majority of our products are used in infrastructure and non-residential construction applications. We also supply products for use in the fabrication, automotive, oil and gas, agricultural and industrial equipment and retail end markets. We manufacture many of our products to operate under specialized conditions, including in load-bearing, high-pressure, corrosive and high-temperature environments.

For the LTM Period, approximately 86% of our net sales was generated in the United States, the balance of which was primarily generated in Canada.

Key Factors Affecting Our Results

Our results are primarily derived from the sale of steel pipe and tube products to various infrastructure and non-residential end markets in the United States and Canada. Our business is therefore dependent upon construction activity in these sectors of the economy. The historical performance and outlook for our business is influenced by numerous factors, including the following:

 

   

Fluctuations in Prices of Steel and Other Costs—Fluctuations in steel prices can lead to volatility in the pricing of our products, which influences the buying patterns of our customers. Because the cost of steel represents over half of our total operating costs, higher or lower cost steel affects our gross margins. Increases in the market price of steel typically enable us to raise our selling prices. To a lesser extent, our gross margins and selling prices can also be impacted by the prices of other raw materials (such as zinc), transportation and labor.

 

   

Economic Cycles—In addition to fluctuations in steel prices, demand for the products we manufacture is dependent on general economic cycles and infrastructure and non-residential construction end markets.

 

   

Inventory Levels—Customer and other manufacturer inventory levels of steel pipe and tube products can change significantly from period to period. During periods of rising steel prices, our customer base has demonstrated the desire to build inventory levels. During periods of decreasing steel prices, our customer base typically reduces inventory levels. We use a number of supply chain and inventory management techniques to help us mitigate the effect of these fluctuations.

 

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General Competition—We sell products in competitive markets. Our business could be adversely affected by competitors who reduce prices, improve on-time delivery and take other competitive actions, which may reduce our customers’ purchases of products from us.

 

   

Foreign Competition—Several of our products have historically faced significant competition from foreign imports, and we have successfully competed against imports with excellent customer service, high quality products and rapid fulfillment of customer orders. Foreign competition has been most significant in our standard pipe and energy tubular businesses with foreign production excluding Canada estimated to represent 45% and 53%, respectively, of volumes of tons sold in the United States for the LTM Period. At various times, we believe we have faced unfair competition due to dumping or subsidization by foreign countries. We believe that various trade cases, tariffs and quotas can improve our competitive environment. We also believe that recent developments, particularly the implementation of trade sanctions against unfairly traded steel and steel products in connection with Section 232 of the Trade Expansion Act of 1962 (“Section 232”), meaningfully enhance our competitive positioning relative to foreign sources of supply. In particular, we believe that the implementation of trade relief in connection with Section 232 (and trade deals negotiated in connection therewith) will cause foreign production to account for a lesser share of total volumes sold in the United States for the foreseeable future. Moreover, since imported products, and those in our product portfolio in particular, must be shipped long distances via ocean freight, we believe domestically produced standard pipe and energy tubular products will remain competitive with imported products, independent of Section 232 or other trade case actions. We face more limited foreign competition in our structural tubing and electrical conduit markets.

Growth Strategy

We intend to expand our leading market positions and scale through a variety of growth initiatives, and to respond to and capitalize on strong demand for our products and sustained strength in our end markets. At present, we have identified a number of pending or potential projects to restart idled facilities, optimize existing production capacity by increasing utilization across our portfolio of manufacturing facilities, and build new capacity at our existing locations. For example, during the first quarter of fiscal year 2017, we began the process of restarting and modernizing our Blytheville, Arkansas facility and are currently increasing production of structural tubing at that facility with the expectation of reaching normal capacity and production by the end of the second quarter of fiscal year 2019, and we are engaged in, planning or considering several other optimization activities. We also believe that our industry leading scale and advantaged geographic footprint, together with our sophisticated logistics and information sharing systems and manufacturing facilities’ production flexibility, uniquely position us to optimize our capacity by rapidly responding to improving market conditions. These growth initiatives are outlined in more detail in “Business—Growth Strategy.”

Recent Acquisitions

In the second quarter of fiscal year 2017, we completed two acquisitions: Western Tube and American Tube. Western Tube is located in Long Beach, California and is a leading producer of electrical conduit, fence and mechanical tubing. The acquisition of Western Tube significantly expanded our capabilities and presence in these markets across the western half of the United States. American Tube is located in Birmingham, Alabama and is a leading producer of round, square and rectangular-shaped structural tubing. The acquisition of American Tube significantly expanded our capabilities and presence in this market across the southeastern United States.

Reportable Segments

We have three reportable segments:

 

   

Atlas—structural tubing;

 

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Table of Contents
   

EFM—electrical conduit, fittings and couplings, fence pipe and mechanical tubing; and

 

   

Pipe—standard pipe and fire sprinkler pipe.

In addition to our three reportable segments, our consolidated financial results include an “All Other” category, which includes our DOM tubing and energy tubular product lines, our Z Modular business and other non-core activities that are not material enough to require separate disclosure, as well as unallocated corporate costs.

We evaluate segment performance primarily on the basis of net sales and operating income. Certain manufacturing and distribution expenses are allocated among the segments due to the sharing of manufacturing facilities and other activities.

Discontinued Operations

In the first quarter of fiscal year 2016, our Board of Directors formally approved a plan to sell our EnergeX business, which is comprised primarily of two idled manufacturing facilities in Welland, Ontario and Thomasville, Alabama. For all periods presented in our consolidated financial statements the EnergeX assets and liabilities are classified separately as “held for sale” and EnergeX’s operating results and cash flows are presented as discontinued operations.

As of June 30, 2018, the EnergeX business continues to meet the requirements for presentation as “held for sale” and discontinued operations. Market conditions in the oil and gas industry, and specifically related to OCTG, continue to affect our ability to sell the EnergeX business. Based on these changing market conditions, we have taken steps as needed to adjust our formal plan to sell EnergeX, and we continue to actively market the business at a price that we feel is reasonable based on the current circumstances. If certain events or changes in circumstances arise, such as being unable to sell our EnergeX business for a prolonged period of time, we may need to reclassify the related assets and liabilities from “held for sale” to “held and used” and change the presentation of EnergeX’s operating results and cash flows back to continuing operations.

Unless otherwise noted all information and discussion in this prospectus reflects only continuing operations.

Fiscal Year

We use a fiscal year that is a 52 or 53 week period ending on the last Saturday in September. Fiscal year 2018 will end on September 29, 2018 and will consist of 52 weeks. Fiscal year 2017 ended on September 30, 2017 and consisted of 53 weeks. Fiscal year 2016 ended on September 24, 2016 and consisted of 52 weeks. Fiscal year 2015 ended on September 26, 2015 and consisted of 52 weeks. Our fiscal quarters are all 13 or 14 week periods generally ending on the last Saturday in December, March, June and September. The third quarter and first nine months of fiscal year 2018 ended on June 30, 2018 and consisted of 13 weeks and 39 weeks, respectively. The third quarter and first nine months of fiscal year 2017 ended on June 24, 2017 and consisted of 13 weeks and 39 weeks, respectively.

 

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Results of operations

13 Weeks Ended June 30, 2018 compared to 13 Weeks Ended June 24, 2017

The following table compares our consolidated results for the third quarter of fiscal year 2018 to the third quarter of fiscal year 2017 (dollars in thousands):

 

     13 Weeks Ended  
     June 30,
2018
     June 24,
2017
    Change     Percentage
Change
 

Tons sold (kt)

     532        477       55       11.5

Net sales

   $ 783,134      $ 564,226     $ 218,908       38.8

Cost of sales

     571,359        446,436       124,923       28.0
  

 

 

    

 

 

   

 

 

   

Gross profit

     211,775        117,790       93,985       79.8

Expenses:

         

Selling, general and administrative

     51,955        38,291       13,664       35.7

Exit and restructuring costs

            392       (392     NM  
  

 

 

    

 

 

   

 

 

   

Operating income

     159,820        79,107       80,713       102.0

Interest expense, net

     23,049        22,421       628       2.8

Loss on extinguishment of debt

     360              360       NM  

Debt modification costs

     995              995       NM  

Other expense (income), net

     1,908        (1,302     3,210       NM  
  

 

 

    

 

 

   

 

 

   

Income from continuing operations before income taxes

     133,508        57,988       75,520       130.2

Provision for income taxes

     33,265        9,964       23,301       233.9
  

 

 

    

 

 

   

 

 

   

Income from continuing operations

   $ 100,243      $ 48,024     $ 52,219       108.7
  

 

 

    

 

 

   

 

 

   

NM = not meaningful

Net Sales.    Our net sales increased $218.9 million or 38.8% in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. This change was due to a 22.9% increase in the average selling price of our products and an 11.5% increase in tons sold. The increase in selling prices was a direct result of passing through higher steel prices in the third quarter of fiscal year 2018. The increase in tons sold was primarily related to our structural tubing business, which benefited from increased end-user demand and our recently restarted and modernized mill in Blytheville, Arkansas.

Cost of Sales.    Our cost of sales increased $124.9 million or 28.0% in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. This increase was due to higher input costs, primarily driven by higher steel prices, and the 11.5% increase in tons sold.

Gross Profit.    Our gross profit was $211.8 million, or 27.0% of net sales, in the third quarter of fiscal year 2018 as compared to $117.8 million, or 20.9% of net sales, in the third quarter of fiscal year 2017. This increase in gross profit margin was due to the timing of raw material purchases in a period of rising steel prices, and our ability to retain more input cost pass-through in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. In addition, the third quarter of fiscal year 2018 was positively impacted by the full effect of synergies from the Western Tube and American Tube acquisitions, and the third quarter of fiscal year 2017 had higher cost of sales resulting from inventory step-up purchase accounting adjustments for Western Tube and American Tube.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $52.0 million in the third quarter of fiscal year 2018 as compared to $38.3 million in the third quarter of fiscal year 2017. As a percentage of net sales, selling, general and administrative

 

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expenses were 6.6% and 6.8% in the third quarter of fiscal years 2018 and 2017, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales was largely due to the fixed cost nature of certain expenses, such as amortization expense related to intangible assets, depreciation expense and employee salaries and benefits, coupled with the increase in net sales.

Exit and Restructuring Costs.    We incurred exit and restructuring costs of $0.4 million in the third quarter of fiscal year 2017 related to exiting certain acquired lines of business and related downsizing at Western Tube, as well as costs at Council Avenue and Mill Street manufacturing facilities in Wheatland, PA and Sharon, PA, respectively.

Operating Income.    As a result of the aforementioned items, our operating income was $159.8 million in the third quarter of fiscal year 2018 as compared to $79.1 million in the third quarter of fiscal year 2017.

Interest Expense, Net.    Our interest expense, net of interest income, was $23.0 million in the third quarter of fiscal year 2018 as compared with $22.4 million in the third quarter of fiscal year 2017. The increase is due to certain non-cash charges in connection with our termination and exchange of revolving credit facilities in June 2018.

Loss on extinguishment of debt.    We recognized a $0.4 million loss on extinguishment of debt in the third quarter of fiscal year 2018 in connection with the May 2018 amendment of our Term Loan Facility and the write-off of certain capitalized amounts from our previous debt issuances.

Debt Modification Costs.    We recognized $1.0 million of debt modification costs in the third quarter of fiscal year 2018 in connection with the May 2018 amendment of our Term Loan Facility. This amount was expensed immediately because a significant portion of the outstanding and new term debt was deemed to be modified as opposed to extinguished under the applicable accounting guidance.

Other Expense (Income), Net.    During the third quarter of fiscal year 2018, we recorded other expense, net of $1.9 million as compared to other income, net of $1.3 million in the third quarter of fiscal year 2017. In each period, these amounts were primarily related to foreign exchange gains and losses on intercompany and third party transactions and intercompany loans denominated in currencies other than the functional currencies of the related entities.

Provision for Income Taxes.    Our provision for income taxes was $33.3 million in the third quarter of fiscal year 2018 as compared to $10.0 million in the third quarter of fiscal year 2017. Our effective income tax rate was 24.9% for the third quarter of fiscal year 2018 as compared to 17.2% for the third quarter of fiscal year 2017. The effective tax rate in 2017 was lower due to the expected mix of full fiscal year earnings between our United States and Canadian jurisdictions and the corresponding tax rate differential. The Tax Reform reduces the U.S. federal statutory income tax rate from 35.0% to 21.0%, effective January 1, 2018. As a result of this change, for our third quarter of fiscal year 2018 interim tax calculations we applied a blended federal statutory income tax rate of 24.5%. Therefore, our effective tax rate for the third quarter of fiscal year 2018 was generally consistent with U.S. and Canadian statutory tax rates.

Income from Continuing Operations.    As a result of the aforementioned items, we reported income from continuing operations of $100.2 million in the third quarter of fiscal year 2018 as compared to $48.0 million in the third quarter of fiscal year 2017.

 

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Reportable Segments.    The key measures of segment performance are summarized as follows for the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017 (dollars in thousands):

 

     13 Weeks Ended  
     June 30,
2018
     June 24,
2017
     Change     Percentage
Change
 

Tons sold (kt):

          

Atlas

     333        269        64       23.8

EFM

     96        99        (3     (3.0 )% 

Pipe

     74        76        (2     (2.6 )% 

Net sales from external customers:

          

Atlas

   $ 386,932      $ 258,768      $ 128,164       49.5

EFM

   $ 215,962      $ 167,304      $ 48,658       29.1

Pipe

   $ 109,172      $ 86,653      $ 22,519       26.0

Operating income:

          

Atlas

   $ 69,228      $ 43,789      $ 25,439       58.1

EFM

   $ 73,986      $ 28,213      $ 45,773       162.2

Pipe

   $ 22,944      $ 8,494      $ 14,450       170.1

Atlas.    Atlas net sales increased $128.2 million or 49.5% in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. This change was due to an 21.1% increase in the average selling price of our products and a 23.8% increase in tons sold. The increase in selling prices was a direct result of passing through higher steel prices in the third quarter of fiscal year 2018. The increase in tons sold for Atlas was primarily due to increased end-user demand and additional tons sold from the restarted and modernized Blytheville, Arkansas facility.

Our Atlas operating income was $69.2 million in the third quarter of fiscal year 2018 as compared to $43.8 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, Atlas operating income was 17.9% and 16.9% in the third quarter of fiscal years 2018 and 2017, respectively. Atlas operating income as a percentage of net sales was higher in 2018 due to a slightly higher gross profit margin, as well as the fixed cost nature of certain expenses, such as amortization expense related to intangible assets, depreciation expense and employee salaries and benefits, coupled with the increase in net sales.

EFM.    EFM net sales increased $48.7 million or 29.1% in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. This change was due to a 27.5% increase in the average selling price of our products, partially offset by a 3.0% decrease in tons sold. The increase in selling prices was a direct result of passing through higher steel prices in the third quarter of fiscal year 2018. The decrease in tons sold was partially due to our decision to exit certain acquired product types related to mechanical tubing formerly produced by Western Tube.

Our EFM operating income was $74.0 million in the third quarter of fiscal year 2018 as compared to $28.2 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, EFM operating income was 34.3% and 16.9% in the third quarter of fiscal years 2018 and 2017, respectively. EFM operating income as a percentage of net sales was higher in the current year due to a significantly higher gross profit margin based on the timing of raw material purchases in a period of rising steel prices, the 27.5% increase in the average selling price of our products noted above and higher cost of sales in the third quarter of fiscal year 2017 resulting from inventory step-up purchase accounting adjustments for Western Tube. In addition, the third quarter of fiscal year 2018 was positively impacted by the combined efficiencies of Western Tube with our existing EFM business.

Pipe.    Pipe net sales increased $22.5 million or 26.0% in the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017. This change was due to a 32.0% increase in the

 

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average selling price of our products, partially offset by a 2.6% decrease in tons sold. The increase in selling prices was a direct result of passing through higher steel prices in the third quarter of fiscal year 2018. The decrease in tons sold was partially due to more competition from imports in the period as foreign suppliers shipped additional product to the United States in an effort to avoid expected future trade duties and tariffs.

Our Pipe operating income was $22.9 million in the third quarter of fiscal year 2018 as compared to $8.5 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, Pipe operating income was 21.0% and 9.8% in the third quarter of fiscal years 2018 and 2017, respectively. Pipe operating income as a percentage of net sales was higher in the current year due to a significantly higher gross profit margin based on the timing of raw material purchases in a period of rising steel prices, and the 32.0% increase in the average selling price of our products noted above.

39 Weeks Ended June 30, 2018 compared to 39 Weeks Ended June 24, 2017

The following table compares our consolidated results for the first nine months of fiscal year 2018 to the first nine months of fiscal year 2017 (dollars in thousands):

 

     39 Weeks Ended  
     June 30,
2018
     June 24,
2017
    Change     Percentage
Change
 

Tons sold (kt)

     1,546        1,344       202       15.0

Net sales

   $ 1,981,735      $ 1,480,901     $ 500,834       33.8

Cost of sales

     1,508,763        1,156,454       352,309       30.5
  

 

 

    

 

 

   

 

 

   

Gross profit

     472,972        324,447       148,525       45.8

Expenses:

         

Selling, general and administrative

     138,357        107,905       30,452       28.2

Transaction costs

            731       (731     NM  

Exit and restructuring costs

     108        1,764       (1,656     (93.9 )% 
  

 

 

    

 

 

   

 

 

   

Operating income

     334,507        214,047       120,460       56.3

Interest expense, net

     65,490        69,045       (3,555     (5.1 )% 

Loss on extinguishment of debt

     360              360       NM  

Debt modification costs

     995        1,587       (592     (37.3 )% 

Bargain purchase gain

            (1,745     1,745       NM  

Other expense, net

     6,590        558       6,032       NM  
  

 

 

    

 

 

   

 

 

   

Income from continuing operations before income taxes

     261,072        144,602       116,470       80.5

Provision for income taxes

     55,413        24,830       30,583       123.2
  

 

 

    

 

 

   

 

 

   

Income from continuing operations

   $ 205,659      $ 119,772     $ 85,887       71.7
  

 

 

    

 

 

   

 

 

   

NM = not meaningful

Net Sales.    Our net sales increased $500.8 million or 33.8% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. Western Tube and American Tube, which are included in our results for the full period in 2018 as compared to only a portion of the period in 2017 following the acquisitions in February 2017, accounted for over $135 million or approximately 9 percentage points of the total increase, a portion of which is attributable to year-over-year organic growth. On an overall basis, the average selling price of our products increased 15.7% and we sold 15.0% more tons in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. The increase in selling prices was a direct result of passing through higher steel prices in

 

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the first nine months of fiscal year 2018. The increase in tons sold was partly due to the inclusion of Western Tube and American Tube for the full period in 2018, as well as strong end-user demand for structural tubing, the impact of our recently restarted and modernized mill in Blytheville, Arkansas, higher fence pipe sales following a new sales strategy and general market improvements for DOM tubing products.

Cost of Sales.    Our cost of sales increased $352.3 million or 30.5% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. Western Tube and American Tube accounted for a significant portion of the current period’s total increase. The remainder of the increase was due to higher input costs, primarily driven by higher steel prices, and an estimated 8.3% increase in tons sold, exclusive of Western Tube and American Tube.

Gross Profit.    Our gross profit was $473.0 million, or 23.9% of net sales, in the first nine months of fiscal year 2018 as compared to $324.4 million, or 21.9% of net sales, in the first nine months of fiscal year 2017. This increase in gross profit margin was due to the timing of raw material purchases in a period of rising steel prices, and our ability to retain more input cost pass-through in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. In addition, the fiscal year 2018 period was positively impacted by the full effect of synergies from the Western Tube and American Tube acquisitions, and the fiscal year 2017 period had higher cost of sales resulting from inventory step-up purchase accounting adjustments for Western Tube and American Tube.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $138.4 million in the first nine months of fiscal year 2018 as compared to $107.9 million in the first nine months of fiscal year 2017. As a percentage of net sales, selling, general and administrative expenses were 7.0% in the first nine months of fiscal year 2018 compared to 7.3% in the first nine months of fiscal year 2017. The increase in selling, general and administrative expenses was largely due to higher stock-based compensation in the first nine months of fiscal year 2018 and the impact of Western Tube and American Tube for the full period in 2018. The decrease in selling, general and administrative expenses as a percentage of net sales was largely due to the fixed cost nature of certain expenses, such as amortization expense related to intangible assets, depreciation expense and employee salaries and benefits, coupled with the increase in net sales.

Transaction Costs.    We incurred $0.7 million in transaction costs during the first nine months of fiscal year 2017 associated with the acquisitions of Western Tube and American Tube.

Exit and Restructuring Costs.    We incurred exit and restructuring costs of $0.1 million and $1.8 million in the first nine months of fiscal years 2018 and 2017, respectively. The prior period amount includes $0.9 million related to exiting certain acquired lines of business and related downsizing at Western Tube and costs related to our Council Avenue and Mill Street manufacturing facilities in Wheatland, Pennsylvania and Sharon, Pennsylvania, respectively.

Operating Income.    As a result of the aforementioned items, our operating income was $334.5 million in the first nine months of fiscal year 2018 as compared to $214.0 million in the first nine months of fiscal year 2017.

Interest Expense, Net.    Our interest expense, net of interest income, was $65.5 million in the first nine months of fiscal year 2018 as compared with $69.0 million in the first nine months of fiscal year 2017. The decrease is due to a lower interest rate on our term debt as a result of favorable amendments to our Term Loan Facility in February 2017, August 2017 and May 2018.

Debt Modification Costs.    We recognized $1.0 million and $1.6 million of debt modification costs in the first nine months of fiscal years 2018 and 2017, respectively, in connection with amendments of our Term Loan Facility. These amounts were expensed immediately based on the

 

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portion of the outstanding and new term debt deemed to be modified as opposed to extinguished under the applicable accounting guidance.

Bargain Purchase Gain.    We recognized a $1.7 million gain in the first nine months of fiscal year 2017 in connection with the Western Tube acquisition as the estimated fair value of the net assets acquired exceeded the purchase price.

Other Expense, Net.    During the first nine months of fiscal year 2018, we recorded other expense, net of $6.6 million as compared to $0.6 million in the first nine months of fiscal year 2017. In each period, these amounts were primarily related to foreign exchange gains and losses on intercompany and third party transactions and intercompany loans denominated in currencies other than the functional currencies of the related entities. In the first nine months of fiscal year 2017, these losses were partially offset by $1.2 million of gains from the sale of fixed assets.

Provision for Income Taxes.    Our provision for income taxes was $55.4 million in the first nine months of fiscal year 2018 as compared to $24.8 million in the first nine months of fiscal year 2017. Our effective income tax rate was 21.2% for the first nine months of fiscal year 2018 as compared to 17.2% for the first nine months of fiscal year 2017. The effective tax rate in 2017 was significantly impacted by the expected mix of full fiscal year earnings between our United States and Canadian jurisdictions and the corresponding statutory tax rate differential.

Our results for the first nine months of fiscal year 2018 were significantly impacted by the enactment of the Tax Reform. As noted above, as a result of this change we applied a blended federal statutory income tax rate of 24.5% for our fiscal year 2018 interim tax calculations. In addition, we reduced our net U.S. deferred tax liability on our consolidated balance sheet by $21.3 million to reflect the new lower income tax rates. The income tax benefits recognized from these items in the first nine months of fiscal year 2018 were partially offset by the recording of a $13.9 million mandatory repatriation tax liability. The mandatory repatriation tax liability is required by the Tax Reform and relates to the expected one-time income tax payment computed based on undistributed earnings of our foreign operations, and the associated net cash position and foreign taxes incurred by such operations. As the full year results of fiscal year 2018 are not yet known, our adjustment to deferred taxes and our mandatory repatriation tax liability amount are based on certain assumptions and the best available information, but are considered provisional as of June 30, 2018. We will refine these provisional adjustments and amounts in the fourth quarter of fiscal year 2018 based on our actual financial results and as more information becomes available.

Income from Continuing Operations.    As a result of the aforementioned items, we reported income from continuing operations of $205.7 million in the first nine months of fiscal year 2018 as compared to $119.8 million in the first nine months of fiscal year 2017.

 

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Reportable Segments.    The key measures of segment performance are summarized as follows for the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017 (dollars in thousands):

 

     39 Weeks Ended  
     June 30,
2018
     June 24,
2017
     Change     Percentage
Change
 

Tons sold (kt):

          

Atlas

     951        796        155       19.5

EFM

     275        227        48       21.1

Pipe

     235        244        (9     (3.7 )% 

Net sales from external customers:

          

Atlas

   $ 982,605      $ 711,506      $ 271,099       38.1

EFM

   $ 529,866      $ 384,464      $ 145,402       37.8

Pipe

   $ 301,542      $ 265,860      $ 35,682       13.4

Operating income:

          

Atlas

   $ 170,937      $ 126,112      $ 44,825       35.5

EFM

   $ 134,373      $ 67,394      $ 66,979       99.4

Pipe

   $ 47,454      $ 31,058      $ 16,396       52.8

Atlas.    Atlas net sales increased $271.1 million or 38.1% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. American Tube, which is included in our results for the full period in 2018 as compared to only a portion of the period in 2017 following its acquisition in February 2017, accounted for over $55 million, or approximately 8 percentage points of the total increase. On an overall basis, the average selling price of our Atlas products increased 15.4% and we sold 19.5% more tons in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. The increase in selling prices was a direct result of passing through higher steel prices in the first nine months of fiscal year 2018. The increase in tons sold was partly due to the inclusion of American Tube for the full period in 2018, as well as strong end-user demand for structural tubing and the impact of our recently restarted and modernized mill in Blytheville, Arkansas.

Our Atlas operating income was $170.9 million in the first nine months of fiscal year 2018 as compared to $126.1 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, Atlas operating income was 17.4% and 17.7% in the first nine months of fiscal years 2018 and 2017, respectively.

EFM.    EFM net sales increased $145.4 million or 37.8% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. Western Tube, which is included in our results for the full period in 2018 as compared to only a portion of the period in 2017 following its acquisition in February 2017, accounted for over $80 million or approximately 21 percentage points of the total increase. On an overall basis, the average selling price of our EFM products increased 11.6% and we sold 21.1% more tons in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. The increase in selling prices was a direct result of passing through higher steel prices in the first nine months of fiscal year 2018. The increase in tons sold was primarily due to the inclusion of Western Tube for the full period in 2018, as well as higher fence pipe sales following a new sales strategy.

Our EFM operating income was $134.4 million in the first nine months of fiscal year 2018 as compared to $67.4 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, EFM operating income was 25.4% and 17.5% in the first nine months of fiscal years 2018 and 2017, respectively. The improvement in EFM’s operating income as a percentage of net sales was due to a significantly higher gross profit margin in the current year based on the timing of raw material purchases in a period of rising steel prices, the 15.4% increase in the average selling

 

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price of our products noted above and higher cost of sales in the first nine months of fiscal year 2017 resulting from inventory step-up purchase accounting adjustments for Western Tube. In addition, the first nine months of fiscal year 2018 were positively impacted by the combined efficiencies of Western Tube with our existing EFM business.

Pipe.    Pipe net sales increased $35.7 million or 13.4% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. This change was due to an 18.2% increase in the average selling price of our products, partially offset by a 3.7% decrease in tons sold. The increase in selling prices was a direct result of passing through higher steel prices in the third quarter of fiscal year 2018. The decrease in tons sold was partially due to more competition from imports in the period as foreign suppliers shipped additional product to the United States in an effort to avoid expected future trade duties and tariffs.

Our Pipe operating income was $47.5 million in the first nine months of fiscal year 2018 as compared to $31.1 million in the comparable fiscal year 2017 period. As a percentage of net sales from external customers, Pipe operating income was 15.7% and 11.7% in the first nine months of fiscal years 2018 and 2017, respectively. The improvement in Pipe’s operating income as a percentage of net sales was due to a significantly higher gross profit margin in the current year based on the timing of raw material purchases in a period of rising steel prices and the 11.6% increase in the average selling price of our products noted above.

Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 24, 2016

The following table compares our consolidated results for fiscal year 2017 to fiscal year 2016 (dollars in thousands):

 

     Year Ended  
     September 30,
2017
    September 24,
2016
     Change     Percentage
Change
 

Tons sold (kt)

     1,874       1,667        207       12.4

Net sales

   $ 2,095,255     $ 1,554,491      $ 540,764       34.8

Cost of sales

     1,657,700       1,200,215        457,485       38.1
  

 

 

   

 

 

    

 

 

   

Gross profit

     437,555       354,276        83,279       23.5

Expenses:

         

Selling, general and administrative

     151,317       130,214        21,103       16.2

Transaction costs

     731              731       NM  

Exit and restructuring costs

     1,873       1,970        (97     (4.9 )% 
  

 

 

   

 

 

    

 

 

   

Operating income

     283,634       222,092        61,542       27.7

Interest expense, net

     92,139       95,931        (3,792     (4.0 )% 

Loss on extinguishment of debt

           19,343        (19,343     NM  

Debt modification costs

     2,725       5,480        (2,755     (50.3 )% 

Bargain purchase gain

     (1,745            (1,745     NM  

Other (income) expense, net

     (8,121     251        (8,372     NM  
  

 

 

   

 

 

    

 

 

   

Income from continuing operations before income taxes

     198,636       101,087        97,549       96.5

Provision for income taxes

     35,340       16,008        19,332       NM  
  

 

 

   

 

 

    

 

 

   

Income from continuing operations

   $ 163,296     $ 85,079      $ 78,217       91.9
  

 

 

   

 

 

    

 

 

   

NM = not meaningful

Net Sales.    Our net sales increased $540.8 million or 34.8% in fiscal year 2017 compared to fiscal year 2016. The inclusion of the results of Western Tube and American Tube accounted for

 

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$193.0 million or 12.4 percentage points of fiscal year 2017’s total increase, a portion of which is attributable to year-over-year organic growth. The remainder of the increase was due to a 16.0% increase in the average selling price of our products and a 4.4% increase in tons sold, exclusive of Western Tube and American Tube. The increase in selling prices was a direct result of passing through higher steel prices in fiscal year 2017. The increase in tons sold primarily related to structural tubing behind strong end-user demand and energy tubular products, as the increase in oil and gas exploration in the United States led to higher sales especially in the second half of fiscal year 2017. Additionally, fiscal year 2017 included an additional week of operations as compared to the prior year.

Cost of Sales.    Our cost of sales increased $457.5 million or 38.1% in fiscal year 2017 compared to fiscal year 2016. The inclusion of the results of Western Tube and American Tube accounted for $160.4 million or 13.4 percentage points of fiscal year 2017’s total increase. The remainder of the increase was due to higher input costs, primarily driven by higher steel and zinc prices, and the 4.4% increase in tons sold, exclusive of Western Tube and American Tube. Additionally, cost of sales in fiscal year 2017 was higher due to the additional week of operations as compared to the prior year.

Gross Profit.    Our gross profit was $437.6 million, or 20.9% of net sales, in fiscal year 2017 as compared to $354.3 million, or 22.8% of net sales, in fiscal year 2016. This decrease in gross profit margin was due to the timing of raw material purchases in a period of rising steel and zinc prices, and not being able to pass on all input price fluctuations to our customers, resulting in lower relative pass-throughs in fiscal year 2017 compared to fiscal year 2016. In addition, our fiscal year 2017 gross profit margin was impacted by product mix, as certain lower margin product lines experienced increases in tons sold, and higher cost of sales resulting from inventory step-up purchase accounting adjustments for Western Tube and American Tube.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $151.3 million in fiscal year 2017 as compared to $130.2 million in fiscal year 2016. As a percentage of net sales, selling, general and administrative expenses were 7.2% and 8.4% in fiscal years 2017 and 2016, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales was largely due to the fixed cost nature of certain expenses, such as amortization expense related to intangible assets, depreciation expense and employee salaries and benefits, coupled with the increase in net sales.

Transaction Costs.    We incurred $0.7 million in transaction costs during the second quarter of 2017 associated with the acquisitions of Western Tube and American Tube.

Exit and Restructuring Costs.    We incurred exit and restructuring costs of $1.9 million and $2.0 million during fiscal years 2017 and 2016, respectively. The current year amount includes $1.0 million related to exiting certain acquired product types and downsizing at Western Tube. The remaining amounts in both years relate to our Council Avenue and Mill Street manufacturing facilities in Wheatland, Pennsylvania and Sharon, Pennsylvania, respectively.

Operating Income.    As a result of the aforementioned items, our operating income was $283.6 million in fiscal year 2017 as compared to $222.1 million in fiscal year 2016.

Interest Expense, Net.    Our interest expense, net of interest income, was $92.1 million in fiscal year 2017 as compared to $95.9 million in fiscal year 2016. The decrease is a result of lower interest costs following our June 2016 debt refinancing and the favorable term loan amendments in February 2017 and August 2017.

Loss on Extinguishment of Debt.    We recognized a loss on extinguishment of debt in fiscal year 2016 related to our debt refinancing completed in June 2016. The primary components of this loss were an aggregate call premium of $16.7 million on the redemption of our Unsecured Senior Notes and the net write-off of $3.7 million related to certain capitalized amounts from our previous debt issuances. In addition, during fiscal year 2016 we recorded debt extinguishment gains of $1.1 million, related to repurchasing portions of our outstanding Unsecured Senior Notes on the open market.

 

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Debt Modification Costs.    We recognized $2.7 million of debt modification costs in fiscal year 2017 in connection with the February 2017 and August 2017 amendments of our Term Loan facility. These amounts were expensed immediately as all outstanding and new term debt was deemed to be modified as opposed to extinguished under the applicable accounting guidance. We recognized $5.5 million of debt modification costs in fiscal year 2016. This amount represents the portion of our overall costs related to the June 2016 amendment and restatement of our Term Loan Facility that was expensed immediately as the outstanding term debt was deemed to be modified as opposed to extinguished.

Bargain Purchase Gain.    We recognized a $1.7 million gain in the second quarter of fiscal year 2017 in connection with the Western Tube acquisition as the estimated fair value of the net assets acquired exceeded the purchase price.

Other (Income) Expense, Net.    During fiscal year 2017, we recorded other income, net of $8.1 million as compared to other expense, net of $0.3 million in fiscal year 2016. In each year, these amounts were primarily related to foreign exchange gains and losses on intercompany and third party transactions and intercompany loans denominated in currencies other than the functional currencies of the related entities. In fiscal year 2017, these losses were partially offset by a $1.1 million gain on the sale of fixed assets.

Provision for Income Taxes.    Our provision for income taxes was $35.3 million in fiscal year 2017 as compared to $16.0 million in fiscal year 2016. Our effective income tax rate was 17.8% in fiscal year 2017 as compared to 15.8% in fiscal year 2016. The effective tax rates for both periods were impacted by the mix of pre-tax earnings and losses between our United States and Canadian jurisdictions and the corresponding statutory tax rate differential. For fiscal year 2017, the effective tax rate was impacted by the release of a significant portion of our valuation allowance related to certain federal and state deferred tax assets.

Income from Continuing Operations.    As a result of the aforementioned items, we reported income from continuing operations of $163.3 million in fiscal year 2017 as compared to $85.1 million in fiscal year 2016.

Reportable Segments.    The key measures of segment performance are summarized as follows for fiscal year 2017 compared to fiscal year 2016 (dollars in thousands):

 

     Year Ended  
     September 30,
2017
     September 24,
2016
     Change     Percentage
Change
 

Tons sold (kt):

          

Atlas

     1,115        1,036        79       7.6

EFM

     322        243        79       32.5

Pipe

     332        323        9       2.8

Net sales from external customers:

          

Atlas

   $ 1,013,160      $ 767,672      $ 245,488       32.0

EFM

   $ 549,912      $ 370,969      $ 178,943       48.2

Pipe

   $ 363,052      $ 317,315      $ 45,737       14.4

Operating income:

          

Atlas

   $ 163,432      $ 113,131      $ 50,301       44.5

EFM

   $ 92,690      $ 79,180      $ 13,510       17.1

Pipe

   $ 39,277      $ 43,704      $ (4,427     (10.1 )% 

Atlas.    Atlas net sales increased $245.5 million or 32.0% in fiscal year 2017 compared to fiscal year 2016. The inclusion of the results of American Tube accounted for $46.8 million, or 6.1 percentage points of fiscal year 2017’s total increase. The remainder of the increase was due to a

 

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21.3% increase in the average selling price of our products and a 2.8% increase in tons sold, exclusive of American Tube. The increase in selling prices for Atlas, as well as for EFM and Pipe as noted below, was a direct result of passing through higher steel prices in fiscal year 2017. The increase in tons sold for Atlas was primarily related to strong end-user demand for structural tubing, partially offset by a decrease for piling products due to an overall market decline in western Canada.

Our Atlas operating income was $163.4 million in fiscal year 2017 as compared to $113.1 million in fiscal year 2016. As a percentage of net sales from external customers, Atlas operating income was 16.1% and 14.7% in fiscal year 2017 and fiscal year 2016, respectively. The improvement in Atlas operating income as a percentage of net sales was primarily driven by an increase in net selling prices in excess of the relative increase of costs for new materials purchased.

Additionally, fiscal year 2017 included an additional week of operations as compared to fiscal year 2016.

EFM.    EFM net sales increased $178.9 million or 48.2% in fiscal year 2017 compared to fiscal year 2016. The inclusion of the results of Western Tube accounted for $146.2 million, or 39.4 percentage points of fiscal year 2017’s total increase. The remainder of the increase was due to a 12.3% increase in the average selling price of our products, partially offset by a 2.0% decrease in tons sold, exclusive of Western Tube. This decrease in tons sold was driven by a large reduction in fence pipe tons as competitors with pre-galvanized fence posts were able to gain market share.

Our EFM operating income was $92.7 million in fiscal year 2017 as compared to $79.2 million in fiscal year 2016. As a percentage of net sales from external customers, EFM operating income was 16.9% and 21.3% in fiscal year 2017 and fiscal year 2016, respectively. The decrease in EFM operating income as a percentage of net sales was due to a lower relative operating margin rate for Western Tube in the first six months of ownership and a significant increase in the cost of zinc, which is a primary material in galvanized EFM product.

As noted above, fiscal year 2017 included an additional week of operations as compared to fiscal year 2016.

Pipe.    Pipe net sales increased $45.7 million or 14.4% in fiscal year 2017 compared to fiscal year 2016. This change was due to an 11.3% increase in the average selling price of our products and a 2.8% increase in tons sold. This improvement in tons sold was primarily related to fire sprinkler pipe as we improved our market share in fiscal year 2017.

Our Pipe operating income was $39.3 million in fiscal year 2017 as compared to $43.7 million in fiscal year 2016. As a percentage of net sales from external customers, Pipe operating income was 10.8% and 13.8% in fiscal year 2017 and fiscal year 2016, respectively. The decrease in Pipe operating income as a percentage of net sales was primarily driven by higher steel prices not fully offset by net realized selling price increases.

As noted above, fiscal year 2017 included an additional week of operations as compared to fiscal year 2016.

 

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Fiscal Year Ended September 24, 2016 Compared to Fiscal Year Ended September 26, 2015

The following table compares our consolidated results for fiscal year 2016 to fiscal year 2015 (dollars in thousands):

 

     Year Ended  
     September 24,
2016
     September 26,
2015
    Change     Percentage
Change
 

Tons sold (kt)

     1,667        1,678       (11     (0.7 )% 

Net sales

   $ 1,554,491      $ 1,712,547     $ (158,056     (9.2 )% 

Cost of sales

     1,200,215        1,466,797       (266,582     (18.2 )% 
  

 

 

    

 

 

   

 

 

   

Gross profit

     354,276        245,750       108,526       44.2

Expenses:

         

Selling, general and administrative

     130,214        123,103       7,111       5.8

Exit and restructuring costs

     1,970        8,771       (6,801     (77.5 )% 
  

 

 

    

 

 

   

 

 

   

Operating income

     222,092        113,876       108,216       95.0

Interest expense, net

     95,931        98,511       (2,580     (2.6 )% 

Loss (gain) on extinguishment of debt

     19,343        (4,480     23,823       NM  

Debt modification costs

     5,480              5,480       NM  

Other expense, net

     251        18,722       (18,471     (98.7 )% 
  

 

 

    

 

 

   

 

 

   

Income from continuing operations before income taxes

     101,087        1,123       99,964       NM  

Provision (benefit) for income taxes

     16,008        (4,637     20,645       NM  
  

 

 

    

 

 

   

 

 

   

Income from continuing operations

   $ 85,079      $ 5,760     $ 79,319       NM  
  

 

 

    

 

 

   

 

 

   

NM = not meaningful

Net Sales.    Our net sales decreased $158.0 million or 9.2% in fiscal year 2016 compared to fiscal year 2015. The year-over-year comparison of net sales was impacted by unfavorable foreign currency fluctuations. Excluding the effect of foreign currency fluctuations, net sales would have decreased $123.4 million or 7.2% in fiscal year 2016 compared to fiscal year 2015. The decrease in net sales in fiscal year 2016 as compared to fiscal year 2015 was primarily due to a 4.7% decrease in the average selling price of our products, excluding the effect of foreign currency fluctuations. This decrease in selling prices was a direct result of lower steel prices in fiscal year 2016, partially offset by the impact of a significant competitor exiting the fence and fire sprinkler pipe markets which constrained supply and elevated market prices.

Cost of Sales.    Our cost of sales decreased $266.6 million or 18.2% in fiscal year 2016 compared to fiscal year 2015. The decrease was due to lower input costs, primarily driven by lower steel prices and a favorable impact from foreign currency translation compared to fiscal year 2015.

Gross Profit.    Our gross profit was $354.3 million, or 22.8% of net sales, in fiscal year 2016 as compared to $245.8 million, or 14.3% of net sales, in fiscal year 2015. This increase in gross profit margin was due to the timing of raw material purchases in a period of declining steel prices, and our ability to retain more input cost pass-through in fiscal year 2016 compared to fiscal year 2015, as evidenced by managing our average selling prices to only a 4.7% decrease. In addition, our fiscal year 2016 gross profit margin was positively impacted by headcount reductions and significant operational improvements at our Council Avenue manufacturing facility that were primarily completed in the second half of fiscal year 2015. We invested approximately $35.0 million of capital expenditures in fiscal years 2014 and 2015 to streamline operations, reduce headcount and improve customer service.

Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $130.2 million in fiscal year 2016 as compared to $123.1 million in fiscal year 2015. As

 

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a percentage of net sales, selling, general and administrative expenses were 8.4% and 7.2% in fiscal year 2016 and fiscal year 2015, respectively. The increase in selling, general and administrative expenses as a percentage of net sales was largely due to the fixed cost nature of certain expenses, such as amortization expense related to intangible assets, depreciation expense and employee salaries and benefits, coupled with the decrease in net sales.

Exit and Restructuring Costs.    We incurred exit and restructuring costs of $2.0 million and $8.8 million during fiscal year 2016 and fiscal year 2015, respectively, related to our Council Avenue and Mill Street manufacturing facilities in Wheatland, Pennsylvania and Sharon, Pennsylvania, respectively. We implemented significant changes and improvements at our Council Avenue plant, which allowed us to close our Mill Street plant in September 2015.

Operating Income.    As a result of the aforementioned items, our operating income was $222.1 million in fiscal year 2016 as compared to $113.9 million in fiscal year 2015.

Interest Expense, Net.    Our interest expense, net of interest income, was $95.9 million in fiscal year 2016 as compared to $98.5 million in fiscal year 2015. The decrease was due to substantially lower borrowings on our Revolving Credit Facility during fiscal year 2016, our repurchase of certain debt obligations starting in the first half of fiscal year 2015 and our mandatory prepayment of $49.6 million of outstanding Term Loan Facility borrowings in the first quarter of fiscal year 2016. The effects of these changes were partially offset by the incurrence of additional interest in June 2016 due to the timing of certain aspects of the closing of our debt refinancing.

Loss (Gain) on Extinguishment of Debt.    We recognized a loss on extinguishment of debt in fiscal year 2016 related to our debt refinancing completed in June 2016. The primary components of this loss were an aggregate call premium of $16.7 million on the redemption of our formerly outstanding unsecured senior notes and the net write-off of $3.7 million related to certain capitalized amounts from our previous debt issuances. In addition, during fiscal year 2016 and fiscal year 2015, we recorded debt extinguishment gains of $1.1 million and $4.5 million, respectively, related to repurchasing portions of our unsecured senior notes on the open market.

Debt Modification Costs.    We recognized $5.5 million of debt modification costs in fiscal year 2016. This amount represents the portion of our overall costs related to the June 2016 amendment and restatement of our Term Loan Facility that was expensed immediately as the outstanding term debt was deemed to be modified as opposed to extinguished under the applicable accounting guidance.

Other Expense, Net.    During fiscal year 2016, we recorded other expense, net of $0.3 million as compared to $18.7 million in fiscal year 2015. In fiscal year 2016, this amount included certain non-operating charges, partially offset by foreign exchange gains on intercompany and third party transactions and intercompany loans denominated in currencies other than the functional currencies of the related entities. The fiscal year 2015 amount was due to foreign exchange losses on similar transactions and intercompany loans.

Provision (Benefit) for Income Taxes.    Our provision for income taxes was $16.0 million in fiscal year 2016 as compared to an income tax benefit of $4.6 million in fiscal year 2015. Our effective income tax rate was 15.8% in fiscal year 2016 as compared to (412.9)% in fiscal year 2015. The effective tax rates for both periods were impacted by the mix of pre-tax earnings and losses between our United States and Canadian jurisdictions and the corresponding effect of the tax rate differential. In addition, the effective tax rates were impacted by increases to our partial valuation allowance of $9.8 million and $18.0 million in fiscal year 2016 and fiscal year 2015, respectively, due to additional uncertainty regarding our ability to utilize all of our federal and state net operating loss carryforwards.

In fiscal year 2015, the impact of permanent differences between pre-tax book income from continuing operations and taxable income/loss and other factors on the effective income tax rate was magnified due to our near break-even pre-tax results.

 

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Income from Continuing Operations.    As a result of the aforementioned items, we reported income from continuing operations of $85.1 million in fiscal year 2016 as compared to $5.8 million in fiscal year 2015.

Reportable Segments.    The key measures of segment performance are summarized as follows for fiscal year 2016 compared to fiscal year 2015 (dollars in thousands):

 

     Year Ended  
     September 24,
2016
     September 26,
2015
     Change     Percentage
Change
 

Tons sold (kt):

          

Atlas

     1,036        1,058        (22     (2.1 )% 

EFM

     243        216        27       12.5

Pipe

     323        326        (3     (0.9 )% 

Net sales from external customers:

          

Atlas

   $ 767,672      $ 908,464      $ (140,792     (15.5 )% 

EFM

   $ 370,969      $ 328,142      $ 42,827       13.1

Pipe

   $ 317,315      $ 340,655      $ (23,340     (6.9 )% 

Operating income:

          

Atlas

   $ 113,131      $ 83,449      $ 29,682       35.6

EFM

   $ 79,180      $ 38,839      $ 40,341       103.9

Pipe

   $ 43,704      $ 18,807      $ 24,897       132.4

Atlas.    Atlas net sales decreased $140.8 million or 15.5% in fiscal year 2016 compared to fiscal year 2015. The year-over-year comparison of net sales was impacted by unfavorable foreign currency fluctuations. Excluding the impact of foreign currency fluctuations, Atlas net sales would have decreased $106.2 million or 11.7% in fiscal year 2016 compared to fiscal year 2015. This decrease, excluding foreign currency fluctuations, was due to a 7.3% decrease in the average selling price of our products and a 2.1% decrease in tons sold. The decrease in selling prices was a direct result of lower steel prices in fiscal year 2016. The decrease in tons sold was primarily due to a decline in sales of proprietary-sized products which had experienced an exceptionally strong year in fiscal year 2015 behind high demand from certain large customers.

Our Atlas operating income was $113.1 million in fiscal year 2016 as compared to $83.4 million in fiscal year 2015. As a percentage of net sales from external customers, Atlas operating income was 14.7% and 9.2% in fiscal year 2016 and fiscal year 2015, respectively. The improvement in operating income as a percentage of net sales for Atlas, as well as for EFM and Pipe as noted below, was due to a normalization of steel prices in fiscal year 2016 versus a very significant drop in prices in fiscal year 2015. The fiscal year 2015 percentages were historically low as falling steel prices adversely impacted our ability to maintain higher selling prices.

EFM.    EFM net sales increased $42.8 million or 13.1% in fiscal year 2016 compared to fiscal year 2015. This was primarily due to a 12.5% increase in tons sold driven by an increase in fence pipe tons as a significant competitor exited the market, and an increase in mechanical tubing product tons related to demand from the solar energy market.

Our EFM operating income was $79.2 million in fiscal year 2016 as compared to $38.8 million in fiscal year 2015. As a percentage of net sales from external customers, EFM operating income was 21.3% and 11.8% in fiscal year 2016 and fiscal year 2015, respectively.

Pipe.    Pipe net sales decreased $23.3 million or 6.9% in fiscal year 2016 compared to fiscal year 2015. This change was due to a 4.4% decrease in the average selling price of our products and a 0.9% decrease in tons sold. The decrease in selling prices was a direct result of lower steel prices in fiscal

 

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year 2016, partially offset by the impact of a significant competitor exiting the fire sprinkler pipe market which constrained supply resulting in higher market prices. The decrease in tons sold was due to lower sales of standard pipe products resulting from increased foreign imports and the short-term shut down of our Council Avenue plant in fiscal year 2016 as part of a major facility upgrade project. These decreases were partially offset by an increase of over 30% in fire sprinkler pipe tons due also to the significant competitor exiting the market.

Our Pipe operating income was $43.7 million in fiscal year 2016 as compared to $18.8 million in fiscal year 2015. As a percentage of net sales from external customers, Pipe operating income was 13.8% and 5.5% in fiscal year 2016 and fiscal year 2015, respectively.

Liquidity and Capital Resources

Primary Sources and Uses of Liquidity

Our primary sources of liquidity consist of existing cash balances, cash flows from our operating activities and availability under our Revolving Credit Facility. Our ability to generate sufficient cash flows from our operating activities is primarily dependent on our sales of steel pipe, tube and ancillary products to our customers at margins sufficient to cover fixed and variable expenses.

As of June 30, 2018, we had cash and cash equivalents of $36.6 million and availability of $344.7 million under our Revolving Credit Facility. Our future liquidity needs will primarily consist of working capital requirements, capital expenditures, debt service requirements and anticipated cash dividends. We may also pursue strategic acquisition opportunities, which would impact our future cash requirements. We believe that our existing cash, cash equivalents and cash flows from operating activities, combined with availability under our Revolving Credit Facility and the portion of the net proceeds of the offering that we intend to retain for general corporate purposes, will be sufficient to meet our presently anticipated future cash needs for the next 12 months. However, we may, from time to time, including in the next 12 months in the event our cash needs exceed present expectations or we otherwise determine it would be in our interests to do so, increase borrowings under our Revolving Credit Facility or issue securities, if market conditions are favorable, to meet our future cash needs or to reduce our borrowing costs.

Indebtedness

As of June 30, 2018, we had $1.3 billion of total indebtedness on a consolidated basis (excluding $10.3 million of letters of credit). On a pro forma as adjusted basis giving effect to this offering and the application of the net proceeds thereof as described in “Use of Proceeds” and “Capitalization,” our total indebtedness on a consolidated basis as of June 30, 2018 would have been $849.8 million. Our primary sources of indebtedness consist of our Term Loan Facility, our Senior Secured Notes and our Revolving Credit Facility.

As of June 30, 2018, we had $907.1 million outstanding under our Term Loan Facility. The maturity date of the Term Loan Facility is June 14, 2021. The Term Loan Facility requires us to make mandatory prepayments under certain circumstances, including if we generate “excess cash flow” during any given fiscal year. The annual excess cash flow calculation is prescribed by the Term Loan Facility and takes into account our cash-based earnings, capital and other expenditures and changes in working capital during the period. Based on the excess cash flow calculation for fiscal year 2015, we made a mandatory prepayment of $49.6 million of the outstanding term loan facility borrowings in the first quarter of fiscal year 2016. No excess cash flow calculation was required for fiscal year 2016 due to the refinancing we completed during the year. Based on the excess cash flow calculation for fiscal year 2017, we were not required to make a mandatory prepayment. The Term Loan Agreement allows for prepayment at any time, in whole or in part, together with accrued interest, without premium or penalty after six months following our most recent amendment in May 2018.

 

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In June 2016, we issued $375.0 million of Senior Secured Notes, all of which remain outstanding as of June 30, 2018. The Senior Secured Notes mature on June 15, 2023.

Our Revolving Credit Facility provides for aggregate commitments of $400.0 million, subject to a borrowing base calculation. The borrowing base is determined by our eligible inventory and accounts receivable balances and is comprised of United States and Canadian components. The maturity date of the Revolving Credit Facility is June 8, 2023. As of June 30, 2018, we had $45.0 million outstanding under the Revolving Credit Facility and $344.7 million of availability.

The agreements governing our Senior Secured Notes, Term Loan Facility and Revolving Credit Facility contain covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:

 

   

incur or guarantee additional indebtedness;

 

   

make certain investments;

 

   

pay dividends or make distributions on our capital stock;

 

   

sell assets, including capital stock of restricted subsidiaries;

 

   

agree to payment restrictions affecting our restricted subsidiaries;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into transactions with our affiliates;

 

   

incur liens; and

 

   

designate any of our subsidiaries as unrestricted subsidiaries.

Certain tangible and financial assets of the Company and its restricted subsidiaries, including the stock and other equity interests of the Company in its restricted subsidiaries, serve as collateral with respect to our Senior Secured Notes, Term Loan Facility and Revolving Credit Facility.

Additionally, while our Term Loan Facility and Revolving Credit Facility generally do not contain financial maintenance covenants, if our excess availability under our Revolving Credit Facility falls below certain thresholds as of the last day of any fiscal quarter, we will be required to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 as of that date. In the event that the requirement to comply with that covenant is triggered and we are unable to comply, we will be in default under the Revolving Credit Facility, which could result in, among other things, the outstanding balance of our loans under our Term Loan Facility and Revolving Credit Facility becoming due and payable immediately.

We were in compliance with all debt covenants as of June 30, 2018.

For additional information regarding our debt agreements, applicable interest rates and other terms, as well as historical activities under those agreements, see “Note 10—Long-Term Debt” to our consolidated annual and interim financial statements included in this prospectus.

 

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Summary of Cash Flows

The following table sets forth our cash flows from continuing operations for the periods indicated below (dollars in thousands):

 

     39 Weeks
Ended
June 30,
2018
    39 Weeks
Ended
June 24,

2017
    Year Ended
September 30,
2017
    Year Ended
September 24,
2016
    Year Ended
September 26,
2015
 

Net cash provided by (used in):

          

Operating activities

   $ 100,919     $ 83,541     $ 159,045     $ 174,124     $ 202,607  

Investing activities

     (62,740     (225,936     (241,217     (38,379     (47,942

Financing activities

     (22,858     135,023       73,878       (134,333     (147,726

Effect of exchange rate change on cash

     (5,101     64       3,283       1,299       (913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

   $ 10,220     $ (7,308   $ (5,011   $ 2,711     $ 6,026  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows Provided by Operating Activities

Our net cash provided by operating activities in the first nine months of fiscal year 2018 was $100.9 million. Beginning with our income from continuing operations of $205.7 million, cash flows from operating activities were negatively impacted by a net increase in working capital and other items of $156.5 million. Inventories were significantly higher because the average price per ton of our inventory was higher than the previous year, and due to a slight increase in inventory tons on hand. Also in the first nine months of fiscal year 2018, accounts receivable increased due to higher sales prices and volume in the third quarter of fiscal year 2018 compared to the fourth quarter of 2017. Total net non-cash charges resulted in a cash flow add-back of $51.7 million for the period.

Our net cash provided by operating activities in the first nine months of fiscal year 2017 was $83.5 million. Beginning with our income from continuing operations of $119.8 million, cash flows from operating activities were negatively impacted by a net increase in working capital and other items of $96.5 million. The most significant changes in working capital were increases in inventories and accounts receivable. Inventories increased as we built up our supply of raw materials to take advantage of favorable steel prices and because the average price per ton of our inventory was higher than the previous year. The increase in accounts receivable was due to significantly higher sales in the third quarter of fiscal year 2017 compared to the fourth quarter of fiscal year 2016. Total net non-cash charges resulted in a cash flow add-back of $60.2 million for the period.

Our net cash provided by operating activities in fiscal year 2017 was $159.0 million. Beginning with our income from continuing operations of $163.3 million, cash flows from operating activities were negatively impacted by a net increase in working capital and other items of $77.4 million. The most significant changes in working capital were increases to inventories and accounts receivable. Inventories increased as we built up our supply of raw materials to take advantage of favorable steel prices and because the average price per ton