UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).  Yes  o No  ý

 

The aggregate market value of the voting stock held by non-affiliates of the registrant.  None

 

The number of shares outstanding of the registrant’s common stock, par value $.01 per share as of May 30, 2003 was 128 shares.

 

 

FORWARD-LOOKING STATEMENTS

 

This Report on Form 10-K includes both historical and forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document, such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” “will,” “should,” and similar expressions, we do so to identify forward-looking statements. Such statements are intended to operate as “forward looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995, incorporated in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. That legislation protects such predictive statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.

 

While we always intend to express our best judgment when we make statements about what we believe will occur in the, future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those anticipated in these forward-looking statements. These forward-looking statements are affected by risks, uncertainties and assumptions that we make, including, among other things.

 

•                  cyclical changes in market supply and demand for steel; general economic conditions; U.S. or foreign trade policy affecting steel imports or exports; and governmental monetary or fiscal policy in the U.S. and other major international economies;

•                  since the beginning of the recession in 2001, key industries we serve have experienced decreased demand for their products, adversely affecting our ability to increase or maintain sales; we do not expect significant improvement in the general economy or the industries we serve in fiscal 2004;

•                  availability and pricing of products we sell are influenced by factors beyond our control, including general economic conditions, bankruptcies or consolidation of primary metal producers, governmental trade restrictions or tariffs on metal products and competition, and may result in volatility in the supply and/or pricing of metal products, our market share and/or gross margins;

•                  risks and uncertainties involving new processes or new technologies, such as the improvements of our information management system and the expansion and automation of our Chicago facility by installing the Kasto system;

•                  our ability to implement customer selling price increases in response to higher metal costs;

•                  the occurrence of unanticipated equipment failures and plant outages or incurrence of extraordinary operating expenses;

•                  actions by our domestic and foreign competitors, including the addition or reduction of production capacity, or loss of business from one or more of our major customers or end-users;

•                  labor unrest, work stoppages and/or strikes involving our own workforce, those of our important suppliers or customers, or those affecting the steel industry in general;

•                  the effect of the elements upon our production or upon the production or needs of our important suppliers or customers; our achievement of management’s business plans;

•                  pending, anticipated private or governmental liability claims or litigation, or the impact of any adverse outcome of any currently pending or future litigation on the adequacy of our reserves, the availability or adequacy of our insurance coverage, our financial well-being or our business and assets;

•                  changes in interest rates or other borrowing costs, or the effect of existing loan covenants or restrictions upon the cost or availability of credit to fund operations or take advantage of other business opportunities;

•                  foreign currency exchange rates could change, affecting the price we pay for certain metals and the results of our foreign operations; and

•                  changes in environmental legislation and environmental conditions.

 

You should be aware that any forward-looking statement made by us in this report, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date of this report.  In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report or elsewhere might not occur.

 

1

 

PART I

 

Item 1.          BUSINESS

 

We were formed on May 3, 1990, when affiliates of Kelso & Companies Inc. acquired control of and combined two leading metals distributors, Earle M. Jorgensen Company, the “Company” or “EMJ”  (founded in 1921) and Kilsby-Roberts Holding Co. (successor to C.A. Roberts Company, founded in 1915).  In connection with this combination, we became a wholly-owned subsidiary of Earle M. Jorgensen Holding Company, Inc. , or “Holding”.

 

We are one of the largest independent distributors of metal products in North America, providing value-added metals processing services and distributing over 25,000 different metals products. We have been distributing metals products for over 80 years and we believe we are the leading distributor of bar and tubing products in North America. We have over 35,000 customers engaged in a wide variety of industries, including machine tools, transportation, industrial equipment, fabricated metal, oil, gas and energy, construction and farm equipment and aerospace. None of our customers represent more than 2% of our gross revenues.

 

In addition to offering a broad range of metals products, we serve our customers by providing metals processing expertise and inventory management services, as well as what we believe is a unique on-time product delivery guaranty.  We process nearly all of the metals products we sell by cutting to length, burning, sawing, honing, shearing, grinding, polishing, or performing other similar services on them, all to customer specifications. During fiscal 2003, we handled approximately 7,500 sales transactions per business day, at an average of $490 per transaction.

 

We operate in one reportable segment—the metals service center industry—through a network of 35 service and processing centers strategically located throughout North America, including three service centers in Canada.  For the fiscal year ended March 31, 2003, we generated revenues of $919.9 million and reported net income and EBITDA (as defined – see “Item 6. Selected Financial Data”) of $2.4 million and $62.5 million, respectively.

 

Industry Overview and Competition

 

Primary metals producers, which manufacture and sell large volumes of steel, aluminum and specialty metals in standard sizes and configurations, generally sell only to those large end users and metals service centers who do not require processing of the products and who can order in large quantities and tolerate relatively long lead times. We do not believe that the role of the primary metals producers will change in the foreseeable future and they will continue to focus on providing efficient and volume-driven production of a limited number of standardized metal products.

 

Metals service centers function as intermediaries between primary metals producers and end users by selling products in smaller quantities and offering value-added or specialized services ranging from pre-production processing in accordance with specific customer requirements to storage and distribution of unprocessed metal products. Metals service centers are the single largest customer group of the U.S. domestic steel industry and serve the metal supply needs of more than 300,000 manufacturers and fabricators through service center locations nationwide. According to industry sources, metals service centers purchase and distribute about 30% of all carbon steel products and nearly 45% of all stainless steel products produced in the U.S. while generating over $40 billion in annual revenues.

 

We believe that the metals service center industry will continue to increase its role as a valuable intermediary between primary metals producers and end users, principally as a result of (i) the metals producers’ efforts to increase sales to larger volume purchasers in order to increase production efficiency and (ii) increased demand by end users for value-added services in order to reduce their costs and capital expenditures associated with the production process.

 

The metals service center industry is highly fragmented, consisting of a large number of small companies, which are limited as to product line, size of inventory and customers located within a specific geographic area, and a few relatively large companies. Nevertheless, based on 2002 data, approximately $25.7 billion of sales in the industry were controlled by the 50 largest metals service centers in North America. The industry includes both general-line distributors, like us, that handle a wide range of metals products, and specialty distributors, which specialize in particular categories of metals products. Geographic coverage by metals service centers is influenced by their national, regional and local representation. Generally, the metals service center industry competes on price and the ability to provide customers with value-added services such as product selection and availability, timely and reliable delivery, quality and processing capability.

 

The larger and more established companies, like EMJ, have certain advantages over smaller companies, such as obtaining higher discounts associated with large volume purchases, the ability to service customers with operations in multiple locations, the use of more sophisticated information systems, and the availability of sufficient working capital to expand product lines, facilities and/or processing capabilities.

 

2

 

Competitive Strengths

 

We believe that the following factors contribute to our success in the metals service center industry:

 

Superior Service, Product Selection, and Quality.    Over the last several years, we have implemented a program for our customers in which we guaranty on-time delivery of our products or they are free. This program, which we believe is unique among major distributors in North America, has been very successful, with on-time performance of over 99% since its inception in 1999. We have been able to successfully offer this service because of the combination of our leading inventory management information systems technology, broad network of service and processing centers, and extensive inventory of core products, including one of the broadest lines of bar and tubing products in North America. In addition to our on-time guaranty and our broad product offering, we are a recognized leader in the metals service center industry with an excellent reputation for quality and service built over our 80 years in operation.  We have received numerous quality and service awards from our customers and have consistently demonstrated our commitment to improve our business in order to better satisfy our customers needs, including being among the first in our industry to receive ISO 9002 and QS 9000 certifications and in providing electronic commerce capabilities.

 

Industry Leading Information Systems.    Our industry leading proprietary management information systems enable us to assess business conditions, monitor operating results, track and allocate inventory among different locations, optimize purchasing and improve customer service through better order and product reference data. The ability to track our inventory system-wide on a real-time basis through our systems allows our salespeople to integrate ordering and scheduling, which enables us to meet our on-time delivery guaranty.  Our proprietary systems have been and will continue to be upgraded,  developed and implemented to improve efficiencies and customer service.

 

Broad Network of Strategically Located Facilities and Diverse Customer Base.    Our service centers are strategically located throughout North America, generally within one day’s delivery time to almost all U.S. manufacturing centers. Our broad service network gives us the ability to provide services to national customers with multiple locations. We serve more than 35,000 customers across a broad range of industries with no single customer accounting for more than 2% of our gross revenues. Our largest ten customers represented approximately 10% of our revenues in fiscal 2003, and the average length of these customer relationships was approximately 13 years.

 

Technology Driven Process Improvements.    We have developed warehouse automation tools to streamline order filling and maximize employee productivity and have invested significantly in automated inventory storage and retrieval systems (“Kasto” systems) in our Kansas City and Chicago facilities.  We believe that these tools and systems have and will continue to reduce our material handling and processing costs, substantially increase order fill rates, and provide us with a significant competitive advantage.  For example, as the result of installing the Kasto system in Kansas City, we added 20% more inventory storage capacity while using 41% less floor space and reduced headcount approximately 18% to 78 in fiscal 2003 from 95 in fiscal year end 1998.  In Chicago, we have already realized benefits from the nearly completed installation of several Kasto systems as part of a 130,400 sq. ft. expansion to our existing 473,300 sq. ft. depot.  When fully operational by September 2003, these Kasto systems will enable the Chicago facility to process and ship more than 4,000 inventory line items per day, compared to its capacity of about 2,200 inventory line items per day prior to such installation, while significantly reducing labor costs.

 

Experienced Management with Significant Equity Ownership.    Our senior management team has an average of 28 years of industry experience. Our chief executive officer, Maurice S. Nelson, has spent over 41 years in the metals industry with us and at Inland Steel Company and Alcoa. Mr. Nelson was named the Service Center Executive of the Year for 2001 by Metal Center News and served as chairman of the Metal Service Center Institute during the 2002 – 2003 year.  Our employees directly, and indirectly through our stock bonus and stock option plans, beneficially own in the aggregate approximately 25.6% (28.5% on a fully-diluted basis) of the outstanding common stock of Holding (the ‘‘Holding Common Stock”) as of March 31, 2003.

 

3

 

Operating and Growth Strategy

 

Our primary business goals are to increase market share, expand services to customers and to improve operating profits and cash flows. Our growth and operating strategies consist of the following elements:

 

Focus on Value-Added Products and Services to Increase Market Share and Gross Margins.  We believe our commitment to provide on-time delivery service will continue to differentiate us and our service capabilities from others in the industry who generally offer only “best efforts” delivery service, which customers find less reliable. We intend to continue to use this competitive advantage to increase our market share. In addition, we seek to increase our gross margins and grow our market share by combining sales from inventory with value-added services such as inventory management and pre-production processing activities, including cutting and honing operations. Accordingly, we will focus on increasing our efficiencies and capacities in these value-added operations and in aggressively marketing these services.

 

Leveraging Core Products.  We have historically been a major purchaser and distributor of various “long” products, namely cold finished carbon and alloy bars, mechanical tubing, stainless bars and shapes, aluminum bars, shapes and tubes, and hot-rolled carbon and alloy bars. Our core products are higher margin products than widely available products, such as flat-rolled steel, sheet and rebar. In addition, we believe our purchasing volumes for our core products enable us to achieve the lowest available product acquisition costs for these products among service centers. As a result, we believe we realize higher gross margins than many of our competitors for our core products. We believe we can significantly grow market share and increase profitability by continuing to focus our marketing efforts on our extensive selection of core products and leveraging our procurement advantage. Leveraging our strength in our core products should enable us to establish competitive advantages in all of our local markets as well as allow us to successfully compete for larger national programs with customers.

 

Maintain Technology Leadership.  We have made and will continue to make investments in technology in order to differentiate our service capabilities from those of our competitors. We will continue to enhance our management information systems by upgrading software and hardware to improve connectivity, stability and reliability of our management information systems and data. These planned improvements include (i) creating a centralized data warehouse to facilitate greater access to transactional information, (ii) developing new electronic commerce tools for customer and  vendor interfaces to offer better compatibility with various systems, (iii) implementing IP Telephony to reduce costs and allow for greater customer service flexibility, and (iv) enhancing our sales and warehouse automation functionality to further improve productivity and efficiency.

 

Expand Satellite Operations.  We believe a key aspect of serving our customers is having a physical presence in those markets requiring our products and services. Accordingly, we have formalized a strategy to target those geographic areas where we can justify opening a “satellite” location. These locations are managed locally by warehouse and delivery personnel, stock a limited inventory of core products and require minimal initial and maintenance capital expenditures, resulting in a low cost opportunity to serve select markets. Each satellite operation is supported by inventory, inside salespeople and the general management of our larger service center responsible for the satellite’s results of operations.  Since the beginning of fiscal 2000, we have opened five satellites and we are evaluating opening another in fiscal 2004.

 

Products And Suppliers

 

We have designated certain carbon and alloy, aluminum, and stainless products as core product offerings under our bar and tubing lines. We also offer certain plate and other products. Each of our service centers stocks a broad range of shapes and sizes of each of these products, as dictated by market demand, in an effort to be a market leader in all of the core product lines in its geographic area.

 

4

 

Carbon steel bar products (hot-rolled and cold-finished) and carbon plate and sheet are used in construction equipment, farm equipment, automotive and truck manufacturing and oil exploration as well as a wide range of other products. Stainless steel bar and plate are used widely in the chemical, petrochemical, and oil refining and biomedical industries where resistance to corrosion is important. Aluminum bar and plate are frequently used in aircraft and aerospace applications where weight is a factor. Different tubing products are appropriate for particular uses based on different characteristics of the tubing materials, including strength, weight, resistance to corrosion and cost. Carbon tubing and pipe are used in general manufacturing. Alloy tubing is used primarily in the manufacturing of oil field equipment and farm equipment. Stainless steel tubing and pipe are used in applications requiring a high resistance to corrosion, such as food processing. Aluminum tubing and pipe are used in applications that put a premium on light-weight (such as aerospace manufacturing).

 

The percentage of revenues generated from sales of material by product group for the fiscal years ended March 31, 2001, 2002 and 2003 is as follows:.

 

		Year Ended March 31,
		2001		2002		2003
Bars:
Carbon and Alloy		36.0	%	36.6	%	37.4	%
Stainless		11.4		11.9		11.3
Aluminum		7.8		7.7		7.9
Total		55.2		56.2		56.6
Tubing:
Carbon and Alloy		24.9		24.6		24.6
Stainless		2.9		3.0		2.9
Aluminum		3.4		3.6		3.2
Total		31.2		31.2		30.7
Plate:
Carbon and Alloy		4.0		3.9		3.5
Stainless		2.2		1.5		1.3
Aluminum		2.9		2.3		2.4
Total		9.1		7.7		7.2
Other		4.5		4.9		5.5
		100.0	%	100.0	%	100.0	%

 

The majority of our procurement activities are handled by a centralized merchandising office in our Chicago facility where specialists in major product lines make the majority of inventory purchases on behalf of our service centers. This merchandising group develops and evaluates the working relationships with high-quality suppliers to ensure availability, quality and timely delivery of product. Because of this centralized coordination and the total volume of purchases we make, we often are a recognized distributor for major metals suppliers and believe that we are able to purchase our core products inventory at the lowest unit cost available in the industry.

 

The majority of our inventory purchases are made by purchase order, and we have no significant supply contracts with periods in excess of one year. We are not dependent on any single supplier for any product or for a significant portion of our purchases, and in fiscal year 2003 no single supplier represented more than 10% of our total purchases. We purchased less than 15% of our inventory requirements from foreign-based suppliers in fiscal 2003.

 

In March 2002, the United States enacted tariffs on certain metal products from specified countries under Section 201 of the Trade Act of 1974 to provide protection for the domestic steel industry for a period of three years. Since that time, certain changes, including exemptions of various metal products have been made.  We do not believe that these tariffs materially impacted the availability or pricing of product we sold during fiscal 2003 or will have a significant impact in fiscal 2004.  However, any significant increase in prices of product purchased by us generally would result in higher prices for product we sell to our customers.

 

5

 

Customers and Markets

 

We provide metal products and value-added metals processing services to over 35,000 customers throughout North America that do business in a wide variety of industries, none of which represents more than 2% of our gross revenues. During fiscal 2003, we processed approximately 7,500 sales transactions per business day generating an average revenue of approximately $490 per transaction.  In addition, sales of material out of our stock inventory (referred to as “stock” sales) represented 90.2%, 89.7% and 90.8% of total revenues generated from material sales for fiscal years 2001, 2002 and 2003, respectively. We believe our ability to support this high proportion of stock sales is critical in growing market share and  maintaining higher gross margins than would otherwise be possible. The balance of revenues represents special customer requirements that we meet by arranging mill-direct sales and by making buy-outs from other distributors of inventory items we do not maintain as stock inventory. Such non-stock sales generally have lower gross margins than stock sales, but provide a valuable customer service.

 

The following table provides the percentage of tonnage sold to our ten largest key industries for the fiscal years ended March 31, 2001, 2002 and 2003.

 

		2001		2002		2003
Machine Tools		27.9	%	27.4	%	27.0	%
Industrial Equipment		11.4		9.5		8.7
Transportation		8.3		8.5		8.1
Construction/Farm Equipment		7.9		8.4		7.9
Fabricated Metal		7.0		6.3		6.6
Metal Service Centers & Wholesale Trade		6.1		6.3		6.6
Screw Machine Products		4.5		4.4		6.0
Fluid Power		4.2		4.1		4.7
Oil, Gas & Energy		2.8		4.3		4.2
Power Transmission Equipment		3.0		2.7		3.4
All Other Industries		16.9		18.1		16.8
Total		100.0	%	100.0	%	100.0	%

 

The majority of our sales originate from individual purchase orders and are not subject to ongoing supply contracts; however, we make some of our sales under contracts that fix the price for up to 12 months. When we enter into a fixed price contract, we enter into a corresponding supply contract with our supplier to cover the commitment to our customer. These corresponding supply contracts substantially reduce the risk of fluctuating prices negatively impacting our margins on these fixed price contracts. Such contracts provide the customer with greater certainty as to timely delivery, price stability and continuity of supply, and sometimes satisfy particular processing or inventory management requirements. Such contracts have resulted in new customer relationships and increased sales volumes, but can have a slightly lower gross margin than our ordinary sales. We believe such contracts, in the aggregate, represented less than 10% of our total revenues in fiscal 2003. In addition, the pricing for most of our sales is set at the time of the sale.

 

Seasonal fluctuations in our business generally occur in the summer months and in November and December, when many customers’ plants and production levels are impacted by retooling, vacations or holidays. Order backlog is not a significant factor, as orders are generally filled within 24 hours.

 

Intellectual Property and Licenses

 

EMJ^® is a registered trademark and, along with our name, is a service mark in the U.S. and in other countries where we do or expect to do business. Other service marks, including hallmarks, logos, taglines or mottos used to conduct business are or will be registered as necessary to protect our proprietary rights. We also own our internet domain name, emjmetals.com.  We consider certain information owned by us to be trade secrets, and we take measures to protect the confidentiality and control the disclosure of such information. We believe that these safeguards adequately protect our proprietary rights. While we consider all of our intellectual property rights as a whole to be important, we do not consider any single right to be essential to our operations.

 

6

 

Management Information Systems

 

Our industry leading proprietary management information systems enable us to assess business conditions, monitor operating results, track and allocate inventory among different locations, optimize purchasing and improve customer service through better order and product reference data. The ability to track our inventory system-wide on a real-time basis through our systems allows our salespeople to integrate ordering and scheduling, which enables us to meet our on-time delivery guaranty.  Our proprietary systems have been and will continue to be upgraded, developed and implemented to improve efficiencies and customer service.

 

Employees

 

As of March 31, 2003, EMJ employed 1,674 persons, of whom 1,020 were employed in production or shipping, 359 were employed in sales and 295 served in executive, administrative or district office capacities. Three different unions represented approximately 613 of our employees from 16 locations. Our collective bargaining agreements expire on staggered dates through March 2010. We believe we have a good overall relationship with our employees and do not expect any significant issues to arise in connection with agreements in the near future.

 

Foreign Operations

 

Through our wholly-owned subsidiary, Earle M. Jorgensen (Canada) Inc., a Canadian limited liability company, we operate three service centers located in Toronto, Montreal and Edmonton. Revenues from our Canadian operations totaled $42.8 million in fiscal 2001, $43.7 million in fiscal 2002 and $54.4 million in fiscal 2003.

 

Governmental Regulations

 

Our operations are governed by many laws and regulations designed to promote workplace safety and to protect the welfare of employees, principally the Occupational Safety and Health Act and regulations thereunder.  We believe we are in material compliance with these laws and regulations and that the continued compliance will not have an adverse effect on our results of operations or financial condition.