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EX-4.7 - FORM OF AMENDMENT NO.1 TO SERIES 2008 PROMISSORY NOTES - TMS International Corp.dex47.htm
EX-23.1 - CONSENT OF ERNST & YOUNG, AN INDEPENDENT REGISTERED ACCOUNTING FIRM - TMS International Corp.dex231.htm
EX-21.1 - SUBSIDIARIES OF THE COMPANY - TMS International Corp.dex211.htm
EX-24.2 - POWER OF ATTORNEY OF MANISH K. SRIVASTAVA - TMS International Corp.dex242.htm
Table of Contents

As filed with Securities and Exchange Commission on February 17, 2011

Registration No. 333-166807

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TMS International Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   3310   20-5899976
(State of Incorporation)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

12 Monongahela Avenue

P.O. Box 2000

Glassport, PA 15045

(412) 678-6141

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Joseph Curtin

President and Chief Executive Officer

TMS International Corp.

12 Monongahela Avenue

P.O. Box 2000

Glassport, PA 15045

(412) 678-6141

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Joel I. Greenberg, Esq.

Derek Stoldt, Esq.

Kaye Scholer LLP

425 Park Avenue

New York, New York 10022

(212) 836-8000

 

Thomas E. Lippard, Esq.

TMS International Corp.

12 Monongahela Avenue

P.O. Box 2000

Glassport, PA 15045

(412) 678-6141

 

Valerie Ford Jacob, Esq.

Daniel J. Bursky, Esq.

Fried, Frank, Harris, Shriver &

Jacobson LLP

One New York Plaza

New York, New York 10004

(212) 859-8000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

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 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(d) 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:  ¨

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities to Be Registered   Proposed Maximum
Aggregate Offering
Price (1)(2)
  Amount of
Registration Fee (3)

Class A common stock, par value $0.001 per share

  $150,000,000   $10,695
 
 
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the offering price of shares of class A common stock that may be purchased by the underwriters upon the exercise of their overallotment option.
(3) Previously 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated February 17, 2011

P R O S P E C T U S

                         Shares

LOGO

TMS INTERNATIONAL CORP.

Class A Common Stock

 

 

This is TMS International Corp.’s initial public offering. We are selling                  shares of our class A common stock, and the selling stockholders are selling                  shares of class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. We have applied for listing of our class A common stock on the New York Stock Exchange under the symbol “TMS.”

Our class A common stock and class B common stock vote as a single class on all matters, except as otherwise provided in our restated certificate of incorporation or as required by law, with each share of class A common stock entitling its holder to one vote and each share of class B common stock entitling its holder to ten votes.

Upon completion of this offering, Onex Corporation and its affiliates will beneficially own approximately         % of the aggregate voting power of our class A common stock and class B common stock, or approximately         % if the underwriters exercise their overallotment option in full. Accordingly, we will be a “controlled company” under the rules of the New York Stock Exchange.

Investing in the class A common stock involves risks, including those in the “Risk Factors” section beginning on page 16 of this prospectus.

 

 

 

   

Per Share

    

Total

 

Public offering price

  $         $     

Underwriting discount

  $         $     

Proceeds, before expenses, to us

  $         $     

Proceeds, before expenses, to the selling stockholders

  $         $     

The underwriters may also purchase up to an additional              and              shares of class A common stock from us and the selling stockholders, respectively, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments, if any. The number of shares that the underwriters purchase from us and the selling stockholders shall be allocated pro rata based upon the number of shares initially sold in connection with this offering.

Neither the Securities and Exchange Commission, or SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                 , 2011.

 

 

 

BofA Merrill Lynch   Credit Suisse   J.P. Morgan

 

 

The date of this prospectus is                 , 2011


Table of Contents

LOGO

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     16   

Forward-Looking Statements

     36   

Use of Proceeds

     38   

Dividend Policy

     38   

Share Recapitalization

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial and Operating Data

     44   

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

     48   

Business

     77   

Our Industry

     94   

Management

     100   

Compensation Discussion and Analysis

     105   

Certain Relationships and Related Transactions

     123   

Principal and Selling Stockholders

     125   

Description of Capital Stock

     128   

Description of Indebtedness

     132   

Shares Eligible for Future Sale

     135   

Material U.S. Federal Income Tax Considerations

     137   

Underwriting

     141   

Legal Matters

     148   

Experts

     148   

Where You Can Find More Information

     148   

Glossary of Selected Industry Terms

     G-1   

Index To Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us that we have referred to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information from that contained in this prospectus. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our class A common stock only in jurisdictions where offers and sales are permitted. The information in this document may only be accurate on the date of this document, regardless of its time of delivery or of any sales of shares of our class A common stock. Our business, financial condition, results of operations or cash flows may have changed since such date.

 

 

This prospectus contains trademarks and registered marks. Unless otherwise indicated, TMS International Corp. or a subsidiary thereof owns such registered marks, including: Tube City IMS®, We Create Value®, Scrap Optimiser®, Genblend®, The Evolution of Value® and certain related designs and logos.

 

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ABOUT THIS PROSPECTUS

Unless the context otherwise indicates or requires, as used in this prospectus:

 

   

“Company,” “we,” “our” or “us” refers to TMS International Corp. and its consolidated subsidiaries;

 

   

“Mill Services Group” refers to the mill services group segment of the Company;

 

   

“Onex” refers to Onex Partners II LP, collectively with other entities affiliated with Onex Corporation;

 

   

“Onex Acquisition” refers to the acquisition of the Predecessor Company on January 25, 2007 by Onex and members of management and the board of directors of Tube City IMS Corporation, a wholly owned subsidiary of the Company;

 

   

“Predecessor Company” refers to Tube City IMS Corporation and its subsidiaries prior to the Onex Acquisition;

 

   

“Raw Material and Optimization Group” refers to the raw material and optimization group segment of the Company; and

 

   

“Successor Company” refers to the Company after the Onex Acquisition.

INDUSTRY, MARKET AND GEOGRAPHICAL DATA

This prospectus includes industry data that we obtained from periodic industry studies and reports, including from The World Steel Association, J.D. Power & Associates, CRU International Ltd., Metals Service Center Institute, IBIS World, Inc., F.W. Dodge, Federal Reserve Statistical Release, Livingston Survey and the American Iron and Steel Institute. In addition, this prospectus includes market share and industry data that we prepared primarily based on our knowledge of the industry in which we operate. The basis of our belief regarding such statements includes the extensive knowledge that our management team has of the outsourced steel services industry, regulatory filings and other publicly-available information about our competitors and market information provided by customers. Statements as to our market position relative to our competitors are approximated by management and are based on the above-mentioned third-party data and internal analyses and estimates.

Where applicable, we report market and other data on the basis of Revenue After Raw Materials Costs, a non-GAAP financial measure that we believe is useful in measuring the operating performance of companies that have procurement businesses, because it excludes the fluctuations in market prices of raw materials procured for and sold to customers that offset on a procurement company’s income statement.

Unless otherwise noted, all information regarding our market share is based on the latest data available to us, and all dollar amounts refer to U.S. dollars. References in this prospectus to a “ton” of material refer to a weight measurement of 2,000 pounds of that material, and references to a “metric ton” of material refer to a weight measurement of 2,204.6 pounds of that material. We have provided definitions for certain steel and outsourced steel services industry terms used in this prospectus in the “Glossary of Selected Industry Terms” on page G-1 of this prospectus.

When we use the term “North America” in this prospectus, we are referring to the United States and Canada. When we use the term “international,” we are referring to countries other than the United States and Canada. When we use the term “Latin America,” we are referring to Mexico, Central America, South America and the Caribbean, including Trinidad & Tobago.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you may want to consider before making an investment decision. You should read the entire prospectus carefully, including the section describing the risks of investing in shares of our class A common stock under the caption “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Some of the statements in this summary are forward-looking statements. For more information, please see “Forward-Looking Statements.”

Our Company

We are the largest provider of outsourced industrial services to steel mills in North America as measured by revenue and have a substantial and growing international presence. We offer the most comprehensive suite of outsourced industrial services to the steel industry. Our employees and equipment are embedded at customer sites and are integral throughout the steel production process other than steel making itself. Our services are critical to our customers’ 24-hour-a-day operations, enabling them to generate substantial operational efficiencies and cost savings while focusing on their core business of steel making. We operate at 73 customer sites in nine countries and our global raw materials procurement network spans five continents. Over the past 80 years we have established long-standing customer relationships and have served our top 10 customers, on average, for over 28 years. Our diversified customer base includes 12 of the top 15 largest global steel producers, including United States Steel, ArcelorMittal, Gerdau, Nucor, Baosteel, POSCO and Tata Steel. For the year ended December 31, 2010, our Total Revenue, Revenue After Raw Materials Costs and Adjusted EBITDA were $2,030.6 million, $466.1 million and $119.9 million, respectively. For a reconciliation of Total Revenue to Revenue After Raw Materials Costs, see “—Summary Consolidated Financial Data.”

Our range of specialized, value-added services is the broadest of any of our competitors and includes: (i) scrap management and preparation; (ii) semi-finished and finished material handling; (iii) metal recovery and slag handling, processing and sales; (iv) surface conditioning; (v) raw materials procurement and logistics; and (vi) proprietary software-based raw materials cost optimization. We combine this full suite of industrial services with a multi-faceted workforce, a large and diverse equipment fleet and rigorous safety and environmental compliance to deliver a differentiated service offering.

Our business model is characterized by long-term contracts and a highly variable cost structure, which enable us to generate strong Free Cash Flow. In 2010, 91% of our Revenue After Raw Materials Costs was generated from long-term contracts under which we provide one or more services. Our earnings are primarily driven by the steel production volumes of our customers rather than by steel prices. Based on production volumes for the year ended December 31, 2010, we estimate our existing contracts would generate approximately $1.7 billion of future Revenue After Raw Materials Costs over their remaining terms. More than 92% of such revenue would be generated from contracts that expire after 2013, and the weighted average remaining term of our contracts is approximately 4.0 years. Our cost structure is highly flexible, with approximately 80% of our cash operating costs being variable, enabling us to respond quickly to changes in market conditions.

Over the last six years, we have expanded from primarily serving North American steel companies to having 19% of our 2010 Revenue After Raw Materials Costs generated internationally. Further, we have grown our scale and diversity by expanding the number of customer sites at which we operate from 64 to 73 and our raw materials procurement locations from 11 to 25, and we have increased the average number of services offered at our customer sites from 2.0 to 2.3. Our growth plans include the following key elements: (i) continue to grow in international markets by leveraging our existing infrastructure, customer relationships, expertise and market credibility; (ii) continue to increase the number of our services offered to our existing customers through cross-selling; and (iii) grow through prudent acquisitions and selective additions to our service offerings.

 

 

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We are a holding company controlled by Onex, and we operate through our wholly-owned subsidiaries, including our primary operating company Tube City IMS, LLC.

Our Services

We provide a broad range of services through two segments: our Mill Services Group and our Raw Material and Optimization Group. For the year ended December 31, 2010, we generated Adjusted EBITDA of $111.3 million and $42.0 million from our Mill Services Group and our Raw Material and Optimization Group, respectively, before total Administrative segment costs of $33.4 million. By comparison, for the year ended December 31, 2009, we generated Adjusted EBITDA of $79.3 million and $31.7 million from our Mill Services Group and our Raw Material and Optimization Group, respectively, before total Administrative segment costs of $27.2 million.

Mill Services Group:

 

   

Scrap Management and Preparation. We provide mills with inspection, preparation and delivery of raw materials, primarily scrap, as well as inventory control through logistics management. Our services include receiving, inspecting, sorting, cleaning, shearing, burning, shredding and baling of primarily ferrous scrap and scrap substitutes (such as pig iron) according to customer specifications.

 

   

Semi-Finished and Finished Material Handling. We handle and transport semi-finished and finished steel products such as steel slabs, billets and plates. Our skilled operators use large slab and billet pallet carriers, forklifts or tractor trailers to transport thousands of tons of materials.

 

   

Metal Recovery and Slag Handling, Processing and Sales. We recycle and process a steel making co-product, known as slag, to recover valuable metallic material that is either reused in the production of steel by the host mill or sold to other end users. The remaining non-metallic materials typically are sold to third parties as aggregates for use in cement production, road construction, agriculture and other applications.

 

   

Surface Conditioning. We pioneered the North American commercial application of robotic surface conditioning. Surface conditioning is a value-added process that removes imperfections from semi-finished steel products to be used in high-value applications that require unblemished finishes such as household appliances and automobiles.

Raw Material and Optimization Group:

 

   

Raw Materials Procurement and Logistics. We operate a worldwide procurement and logistics network to act on behalf of our customers, purchasing approximately nine million tons of raw material inputs annually, including ferrous scrap, scrap substitutes, coke, coal, ferro-alloys and other raw materials used in steel making. In addition to sourcing raw materials for our customers, we arrange point-to-point delivery logistics, providing our customers with a seamless solution globally. We represent certain customers on an exclusive basis globally in the purchase of their ferrous scrap requirements, and represent a number of customers on a non-exclusive basis in the purchase and sale of their scrap products used or generated in the steel and iron making processes while taking minimal inventory or price risk. We occasionally take measured market risk in connection with our raw materials procurement services by either purchasing raw materials at a fixed price without an immediate corresponding sale order or agreeing to sell raw materials at a fixed price before having procured such materials.

 

 

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Proprietary Software-Based Raw Materials Cost Optimization. Our raw materials cost optimization service allows our customers to achieve significant savings by optimizing their use of input materials (specifically ferrous scrap and scrap substitutes) to obtain the lowest liquid steel cost for a specified chemistry of steel. Our proprietary software applications aid mills in the planning, procurement and utilization of ferrous scrap and scrap substitutes, determining the lowest cost input mix based on market conditions, raw materials availability, on-site inventory levels and each steel mill’s unique operating characteristics.

In addition, we provide other services that complement our primary offerings. We leverage our excellent customer relationships to actively pursue new types of service offerings to grow our business.

Our Market Opportunity

Efficient production of steel requires constant operation due to the high costs required to start up and heat the furnaces to the required temperatures. In addition, strict production schedules are essential in order to maximize utilization and productivity and to ensure a competitive cost position. Failures by outsourced service providers can result in significant losses for their customers due to delays in the steel production process or poor product quality. As a result, steel producers generally prefer to contract with proven outsourced service providers who have track records of reliable operational expertise, employee safety, environmental compliance and financial stability.

We believe the following key dynamics will drive the continued growth of the market for outsourced industrial services to the steel making industry:

 

   

Increased Outsourcing, Especially in Developing Markets. The provision of critical industrial services is generally not a core competency of steel producers, yet it is essential to the efficient operation of their complex facilities. We believe that steel producers will increasingly utilize outsourced service providers in order to reduce costs and improve operational efficiency, enabling them to focus their human and capital resources on their core business of steel making. Steel producers in more developed markets such as North America and Western Europe have historically outsourced more industrial services than steel producers in developing markets such as Latin America, Eastern Europe, Asia and the Middle East. However, we believe that as the steel industries in developing markets mature, competition among steel producers will increase and cost and operational efficiencies will become more important, which will increase the amount of outsourcing in these markets.

 

   

Consolidation of Steel Producers Driving Outsourcing. The global steel industry has undergone significant consolidation over the last ten years. We believe that the evolution into a more consolidated, stable and competitive global steel industry has led to more sophisticated management practices, which have significantly increased the international adoption of outsourced industrial services by the steel industry.

 

   

Concentration of Outsourced Services with Fewer, Well-Established Service Providers. The outsourced industrial services market in which we operate is highly fragmented with a large number of small, local and regional service providers, and very few large providers with global capabilities. Many of our large global customers require a full suite of outsourced industrial services at multiple facilities across broad geographies. In addition, we believe these customers are seeking to decrease the administrative burden of managing multiple outsourced providers by reducing the number of vendors they engage to a manageable group of leading service providers differentiated by scale, breadth of service offering, proven service quality and safety.

 

 

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Increased Emphasis on Worker Safety and Environmental Compliance. Our customers are increasingly focused on worker safety and environmental compliance. Accordingly, our customers select industrial service providers with strong safety and environmental track records such as us.

Current Conditions in the Steel Industry

Global steel production is expected to grow at a compound annual growth rate, or CAGR, of 6.1% between 2010 and 2015, according to CRU International Ltd, driven by continued growth in emerging economies and the economic rebound in the developed economies. Steel production growth in North America, our largest market, has begun to recover from the lows of 2009 driven by economic recovery and re-stocking of inventories.

North American steel production declined precipitously during the last quarter of 2008 and the first quarter of 2009 as a result of the global economic crisis. Steel producers responded to the crisis by idling capacity to better align supply with demand, preserve liquidity and reduce costs. Since April 2009, steel production in North America has gradually improved in line with improving economic fundamentals. The U.S. steel industry production capacity utilization rate increased to 74% by the end of January 2011 from a low of 34% in December 2008, according to the American Iron and Steel Institute. North American production capacity utilization levels remain below 25-year average levels of 81%.

Steel demand in North America is driven primarily by applications in non-residential construction, automotive, industrial equipment and consumer appliance end markets, which appear to be in various stages of recovery and resumed growth at this time. Non-residential construction markets remained at cyclical lows in 2010, but are expected to start recovering in 2011 and grow at a CAGR of 16.9% between 2010 and 2015, according to F.W. Dodge Corporation. The North American automotive end-market experienced a strong rebound in 2010, posting a 38% increase in light vehicle production to 11.8 million units when compared to 2009, and is expected to continue to improve for the next several years, growing at a CAGR of 7.2% between 2010 and 2014, as per J.D. Power & Associates.

Our Competitive Strengths

 

   

Leading Market Position. We are the largest provider of outsourced industrial services to steel mills in North America as measured by revenue and have a substantial and growing international presence. In North America, the largest outsourced steel services market, we are the largest provider of five of our six primary services, and we are the second largest provider of raw materials procurement services. In North America, we operate at more customer sites than any of our competitors, providing mill services at approximately 48% of steel producing sites, and arranging raw material transactions on behalf of nearly all major steel producers. Our scale and market position create economies of scale, purchasing power and an ability to rapidly deploy resources and equipment, enabling us to bid competitively on contracts globally. Over the past six years, we have built a substantial presence in Europe and Latin America and have the infrastructure required to offer all of our primary mill services. We have also built a substantial procurement presence in Asia and Europe and are able to offer our procurement services globally.

 

   

Broadest Portfolio of Services Globally. We provide the industry’s most comprehensive suite of outsourced industrial services to steel mills, enabling our customers to generate substantial cost savings through operational efficiencies while focusing on their core business of steel making. Our diversified offering of services and international presence afford us multiple entry opportunities for acquiring new customers and cross-selling. Approximately 54% of our 35 new contracts won since

 

 

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the beginning of 2005 were the result of selling new services to existing customers. As a result, we have increased the average number of our services offered at our customer sites from 2.0 services in 2005 to 2.3 services in 2010.

 

   

Long-Standing Relationships with Leading Steel Producers. We have established long-standing customer relationships and have served our top 10 customers, based on Revenue After Raw Materials Costs for the year ended December 31, 2010, on average for over 28 years. In addition, our customer base includes 12 of the top 15 largest global steel producers. Our services are critical to our customers’ operations, and we believe we are able to provide these services in a more cost-effective manner than if they performed them in-house. Our Mill Services Group employees and equipment are typically embedded at customer sites and have daily interaction with customer personnel, and our Raw Material and Optimization Group is the exclusive purchasing agent for scrap and scrap substitutes for certain of our largest customers. Our deep operational integration, combined with our record of excellent performance and customer service, has driven strong customer loyalty. In addition, our customer relationships are underpinned by an industry-recognized safety record that is consistently better than industry averages. As a result, our contract renewal rate has been greater than 96% from 2005 to 2010 based on Revenue After Raw Materials Costs.

 

   

Long-Term Contracted Revenue and Variable Cost Structure. We provide our services through long-term contracts with our customers, which are typically structured on a fee-per-ton basis tied to production volumes and are not based on the underlying price of steel. In addition, our contracts typically include tiered pricing structures, with unit prices that increase as volumes decline, and/or minimum monthly fees, each of which stabilizes our revenue in the event of volume fluctuations. They also typically provide for price adjustments based on published indices which pass defined increases or decreases in key operating costs through to our customers. We also have a highly scalable cost structure with approximately 80% of our cash operating costs being variable, which protects our profitability during more difficult market conditions such as we experienced during 2009.

 

   

Strong Cash Flow Generation Drives Earnings Growth. Our business model and cost structure enable us to generate strong Free Cash Flow to fund Capital Expenditures and drive earnings growth. We enter into long-term contracts requiring Growth Capital Expenditures only if we determine that they will produce targeted returns on investment. This discipline assures that we deploy our Free Cash Flow in a focused manner to drive stockholder returns. Throughout the recent economic downturn, we continued to enter into new long-term contracts and invest growth capital, thereby positioning us to generate strong earnings growth as steel production volumes continue to recover.

 

   

Experienced, Proven Management Team. Our executive management team has extensive experience, with the members having an average of over 25 years in our industry and over 18 years with us. Our management team successfully integrated the legacy Tube City and IMS businesses, which combined in 2004, and has continued to grow our customer base while consistently improving our industry-leading safety record. In addition, our management team has executed upon our strategic plan to build our international business, increasing the contribution of international Adjusted EBITDA as a percentage of total Adjusted EBITDA from 2% in 2005 to 16% in 2010. In 2009, one of the worst years on record for steel production, our management team responded rapidly, realizing meaningful overhead cost reductions that we believe are sustainable, and carefully managed equipment deployment and Maintenance Capital Expenditures, collectively resulting in expanded Adjusted EBITDA Margins and significant Free Cash Flow.

 

 

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Our Growth Strategy

 

   

Continue to Grow in International Markets. We believe we have substantial international growth opportunities which will be driven by expansion of our existing market share and continued growth in outsourcing in developing markets, such as Latin America, Eastern Europe, Asia and the Middle East, as steel producers discover that outsourcing certain functions enables them to be performed more cost effectively, allowing them to concentrate their attention and resources on steel making. As steel production in developing markets continues to mature and outsourcing of the services that we offer becomes more prevalent, we believe that we are well positioned to capitalize on opportunities due to our scale, existing infrastructure, proven track record and marketplace intelligence. In more developed international markets, outsourcing is common, but we believe steel producers desire more competition from proven operators such as ourselves, providing opportunities to gain market share.

 

   

Increase Penetration of Existing Customers. We believe we are in a unique position to leverage our existing relationships and embedded operations at our customers’ sites to cross-sell additional service offerings. Approximately 54% of our 35 new contracts won since the beginning of 2005 were the result of cross-selling, driven by our customers’ high satisfaction with our existing services, their desire to consolidate services with their best providers and our focus on offering our full array of services to our customers. Over one-half of the new cross-sell contracts we secured since the beginning of 2005 were the result of displacing the incumbent provider, and we will seek to continue to grow through these types of market share gains. On average, we provide approximately 2.3 out of our six primary services at each customer site where we currently operate (up from 2.0 in 2005), representing a significant opportunity to grow within our existing customer base.

 

   

Selectively Expand Service Offerings. We will continue to identify opportunities to leverage our competencies to provide value-added services beyond our existing service offerings that fulfill our customers’ needs. Our embedded on-site presence and daily operational integration with our customers create unique relationships, often allowing us the first opportunity to propose additional outsourced services. We will also continue to expand our global Raw Material and Optimization Group into commodities that we do not currently handle in large quantities.

 

   

Maximize Profit Potential. We will continue to commit growth capital to contracts where we believe our returns will drive future profitability. We will also continue to streamline our cost structure and pay down debt in order to improve operating margins and grow earnings. In addition, our goal is to continue to optimize our equipment utilization to reduce maintenance costs and drive higher cash flow, providing us flexibility to make new growth investments.

 

   

Selectively Pursue Acquisitions and Partnerships. We will selectively pursue strategic acquisitions and partnerships that will diversify our existing portfolio of products and services, expand our geographic footprint and build new customer relationships. Our management team has significant international operating experience in providing outsourced services to the steel industry and strong relationships with leading global and regional steel producers. We believe this will enable us to identify and pursue attractive acquisitions and partnerships.

Risk Factors

An investment in our class A common stock is subject to substantial risks and uncertainties. Before investing in our class A common stock, you should carefully consider the following, as well as the more detailed discussion of risk factors and other information included in this prospectus:

 

   

North American and global steel production volumes and demand for steel are impacted by regional and global economic conditions and by conditions in our key end markets, including automotive, consumer appliance, general industrial and construction markets;

 

 

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we rely on a number of significant customers and contracts, the loss of any of which could have a material adverse effect on our results of operations;

 

   

some of our operations are subject to market price and inventory risk arising from changes in commodity prices;

 

   

if we fail to make accurate estimates in bidding for long-term contracts, our profitability and cash flow could be materially adversely affected;

 

   

operating in various international jurisdictions subjects us to a variety of risks;

 

   

our business involves a number of personal injury and other operating risks, and our failure to properly manage these risks could result in liabilities not covered by insurance and loss of future business, and could have a material adverse effect on our results of operations; and

 

   

our business is subject to environmental regulations that could expose us to liability, increase our cost of operations and otherwise have a material adverse effect on our results of operations.

History and Corporate Information

We operate through our wholly-owned subsidiaries, including our primary operating company Tube City IMS, LLC, a Delaware limited liability company. The Raw Material and Optimization Group traces its roots to Tube City Iron & Metal, or Tube City, formed in 1926 as a scrap metal dealer and processor in McKeesport, Pennsylvania. The Mill Services Group traces its roots to International Mill Service, or IMS, which started in the Cleveland, Ohio area in 1936 in the sand and gravel business and evolved into the slag processing and metal recovery business. Tube City and IMS were combined in 2004.

We currently have approximately 3,500 employees and operate at 73 customer sites around the world. Our principal executive offices are located at 12 Monongahela Avenue, Glassport, Pennsylvania 15045, and our telephone number is (412) 678-6141. Our website address is www.tubecityims.com. Information contained on our website is not a part of this prospectus.

Our Controlling Stockholder

We were formed by Onex on October 31, 2006 in connection with the acquisition in January 2007 of Tube City IMS Corporation from its previous owners. Onex is one of North America’s oldest and most successful investment firms committed to acquiring and building high-quality businesses in partnership with talented management teams. Onex makes private equity investments through the Onex Partners and ONCAP families of funds and has completed more than 290 acquisitions valued at approximately $49 billion. Over Onex’s history, it has had extensive experience investing in outsourcing-focused and industrial businesses. Onex’s recent investments include Spirit AeroSystems, Inc., Allison Transmission, Inc., Husky Injection Molding Systems Ltd., Carestream Health, Inc. and Emergency Medical Services Corporation. Onex’s businesses generate annual revenues of C$37 billion, have assets of C$42 billion and employ over 240,000 people worldwide. Onex shares trade on the Toronto Stock Exchange under the stock symbol “OCX.”

 

 

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The Offering

 

Class A common stock offered by us

             shares

 

Class A common stock offered by the selling stockholders

             shares

 

Shares of class A common stock to be outstanding after the offering

             shares

 

Shares of class B common stock to be outstanding after the offering

             shares

 

Overallotment option

The underwriters may also purchase up to an additional              and              shares of class A common stock from us and the selling stockholders, respectively, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments, if any. The number of shares that the underwriters purchase from us and the selling stockholders shall be allocated pro rata based upon the number of shares initially sold in connection with this offering.

 

Use of proceeds

We estimate that the net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be $             million to us and $         million to the selling stockholders, assuming the shares are offered at $             per share (the mid-point of the price range set forth on the cover of this prospectus). We intend to use the net proceeds to us from this offering for the repayment of certain debt and general corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Dividends

We do not anticipate paying any dividends to our stockholders for the foreseeable future. See “Dividend Policy.”

 

Special voting rights

Each share of our class B common stock will automatically convert into a share of our class A common stock upon a transfer thereof to any person other than the holders of our class B common stock on the date of this offering or their respective affiliates, including upon the sale of any shares in this offering by any selling stockholders. Our class A common stock and class B common stock vote as a single class on all matters, except as otherwise provided in our restated certificate of incorporation or as required by law, with each share of class A common stock entitling its holder to one vote and, prior to the Transition Date (defined below), each share of class B common stock entitling its holder to ten votes. If the Transition Date occurs, the number of votes per share of class B common stock will be reduced automatically to one vote per share. The “Transition Date” will occur when the total number of outstanding shares of class B common stock is less than 10% of the total number of shares of class A common stock and class B common stock outstanding. After giving effect to

 

 

8


Table of Contents
 

this offering, holders of our class B common stock will control         % of the combined voting power of our outstanding common stock. See “Principal and Selling Stockholders” and “Description of Capital Stock.”

 

NYSE symbol

We have applied for listing of our shares of class A common stock on the New York Stock Exchange (“NYSE”) under the symbol “TMS.”

 

Risk factors

See “Risk Factors” beginning on page 16 of this prospectus for a discussion of material risks that prospective purchasers of our common stock should consider.

The number of shares to be outstanding after this offering is based on                  shares of class A common stock and                  shares of class B common stock outstanding as of                     , 2011, and excludes                  shares of class B common stock to be granted under our Restricted Stock Plan concurrently with this offering and                  shares of class A common stock reserved for future issuance under our Long-Term Incentive Plan. Concurrently with this offering, we will award options to purchase                  shares of class A common stock at an exercise price equal to the public offering price of the class A common stock. We are not registering the offering of shares of class A common stock into which the shares of class B common stock may be converted following this offering.

Unless we specifically state otherwise, the information in this prospectus assumes:

 

   

that our class A common stock will be sold at $             per share, which is the mid-point of the price range set forth on the front cover page of this prospectus;

 

   

that the underwriters will not exercise their overallotment option;

 

   

the conversion of all outstanding shares of our class A preferred stock into                  shares of our class B common stock concurrently with the completion of this offering, using the assumptions set forth below;

 

   

a         -for-one split of shares of our common stock, which was effective on                     , 2011;

 

   

the recapitalization of our existing common stock into class B common stock, which was effective as of                     , 2011; and

 

   

the effectiveness of our second amended and restated certificate of incorporation upon the completion of this offering.

The conversion of our class A preferred stock assumes (i) a conversion date of                     , 2011, and (ii) a conversion price of $             (which is the mid-point of the price range set forth on the front cover page of this prospectus). Concurrently with this offering, each share of our class A preferred stock will convert into the number of shares of class B common stock equal to the liquidation value of such share of class A preferred stock at the time of conversion, plus accrued dividends, divided by the public offering price per share of class A common stock in this offering. A $1.00 increase in the assumed initial public offering price of $             per share would decrease the number of shares of class B common stock issuable upon the conversion of the class A preferred stock by approximately                  shares, and a $1.00 decrease in the assumed initial public offering price would increase the number of shares of class B common stock issuable upon the conversion of the class A preferred stock by approximately                  shares.

 

 

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Table of Contents

The purpose of the recapitalization of our existing common stock into class B common stock is to provide our current common stockholders with class B common stock, each share of which entitles its holder to 10 votes for so long as the class B common stock equals or exceeds 10% of the total class A and class B common stock then outstanding. The impact of the share recapitalization will be that, upon completion of this offering, Onex will, for the foreseeable future, continue to have significant influence over our management and affairs and be able to control virtually all matters requiring stockholder approval even if its equity ownership falls below 50%, including the election and removal of directors, the adoption or amendment of our certificate of incorporation and bylaws, possible mergers, corporate control contests and significant corporate transactions. Onex may also delay or prevent a change of control of us, even if that change of control would benefit our stockholders, which could deprive you of the opportunity to receive a premium for your class A common stock.

 

 

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Our Corporate Structure

After giving effect to this offering, the chart below summarizes our corporate structure:

LOGO

 

(1) We intend to redeem in full the series 2008 promissory notes with a portion of the net proceeds of this offering.

 

 

 

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Summary Consolidated Financial Data

The summary consolidated historical statement of operations data for the years ended December 31, 2010, 2009 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The balance sheet data as of December 31, 2010 and December 31, 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 2008 has been derived from our audited financial statements not included in this prospectus.

The summary consolidated financial data set forth below should be read together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated historical financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 
                   

Statement of Operations Data:

     

Revenue:

     

Revenue from Sale of Materials

  $ 2,595,608      $ 986,304      $ 1,629,119   

Service Revenue

    387,305        312,035        401,511   
                       

Total Revenue

    2,982,913        1,298,339        2,030,630   

Costs and expenses:

     

Cost of Raw Materials Shipments

    2,515,425        939,993        1,564,504   

Site Operating Costs

    298,394        233,120        293,003   

Selling, General and Administrative Expenses

    56,750        44,638        53,139   

Provision for (Recovery of) Bad Debts

    9,166        (5,419     64   

Provision for Transition Agreement

    —          2,243        —     

Depreciation

    61,108        57,567        49,317   

Amortization

    11,972        12,193        12,191   

Gain on Debt Extinguishment

    —          1,505        —     

Goodwill Impairment

    —          (55,000     —     

Disposition of Cumulative Translation Adjustment

    —          (1,560     —     

Interest Expense, Net

    (38,079     (44,825     (40,361
                       

Income (Loss) Before Income Taxes

    (7,981     (85,876     18,051   

Income Tax (Expense) Benefit

    1,891        6,885        (10,903
                       

Net Income (Loss)

  $ (6,090   $ (78,991   $ 7,148   
                       

Net Loss Attributable to Common Stock

  $ (25,591   $ (100,060   $ (15,676
                       

 

 

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Table of Contents

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 
                   

Cash Flow Data:

     

Cash Provided by Operating Activities

  $ 36,479      $ 73,223      $ 86,595   

Net Cash Used in Investing Activities

    (80,124     (36,140     (37,875

Net Cash (Used in) Provided by Financing Activities

    47,461        (13,061     (29,042

Balance Sheet Data (at year end):

     

Cash and Cash Equivalents

  $ 5,792      $ 29,814      $ 49,492   

Working Capital(1)

    38,332        9,832        8,837   

Goodwill and Other Intangible Assets

    480,606        420,418        407,443   

Total Assets

    856,865        824,389        878,905   

Long-term Debt, Including Current Portion and Indebtedness to Related Parties

    454,367        449,612        426,641   

Redeemable Preferred Stock and Stockholders’ Deficit

    190,120        122,874        125,891   

Other Financial Data:

     

Revenue After Raw Materials Costs(2)

  $ 467,488      $ 358,346      $ 466,126   

Adjusted EBITDA(3)

    103,178        83,764        119,920   

Adjusted EBITDA Margin(4)

    22.1     23.4     25.7

Capital Expenditures(5)

  $ 62,852      $ 37,635      $ 39,816   

Growth Capital Expenditures(5)

    26,966        23,186        9,475   

Maintenance Capital Expenditures(5)

    35,886        15,792        31,158   

Free Cash Flow(6)

    67,292        67,972        88,762   

 

(1) Working capital is calculated as current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt and revolving borrowings.

 

(2) Revenue After Raw Materials Costs represents Total Revenue minus Cost of Raw Materials Shipments. We believe Revenue After Raw Materials Costs is useful in measuring our operating performance because it excludes the fluctuations in the market prices of the raw materials we procure for and sell to our customers. We subtract the Cost of Raw Materials Shipments from Total Revenue because market prices of the raw materials we procure for and generally concurrently sell to our customers are offset on our statement of operations. By subtracting the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services and we are better able to evaluate our operating performance. Revenue After Raw Materials Costs is not a recognized financial measure under GAAP and may not be comparable to similarly titled measures used by other companies in our industry. Revenue After Raw Materials Costs should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

The following table sets forth our calculation of Revenue After Raw Materials Costs:

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 

Revenue After Raw Materials Costs

     

Total Revenue

  $ 2,982,913      $ 1,298,339      $ 2,030,630   

Cost of Raw Materials Shipments

    (2,515,425     (939,993     (1,564,504
                       

Revenue After Raw Materials Costs

  $ 467,488      $ 358,346      $ 466,126   
                       

 

 

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(3) Adjusted EBITDA represents net income (loss) before income taxes, Interest Expense, Net, Depreciation and Amortization and certain other items, such as losses or gains in respect of debt extinguishment, goodwill impairment charges and dispositions of cumulative translation adjustments. We use Adjusted EBITDA to benchmark the performance of our business against expected results, to analyze year-over-year trends, and to compare our operating performance to that of our competitors. We also use Adjusted EBITDA as a performance measure because it excludes the impact of tax provisions and Depreciation and Amortization, which are difficult to compare across periods due to the impact of accounting for business combinations and the impact of tax net operating losses on cash taxes paid. We believe the presentation of Adjusted EBITDA enhances our investors’ overall understanding of the financial performance of and prospects for our business. Adjusted EBITDA is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income, operating income (loss) or any other performance measures derived in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

The following table reconciles Net Income (Loss) to Adjusted EBITDA:

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 

Adjusted EBITDA

     

Net Income (Loss)

  $ (6,090   $ (78,991   $ 7,148   

Income Tax (Benefit) Expense

    (1,891     (6,885     10,903   

Interest Expense, Net

    38,079        44,825        40,361   

Depreciation and Amortization

    73,080        69,760        61,508   
                       

EBITDA

  $ 103,178      $ 28,709      $ 119,920   

Loss (Gain) on Debt Extinguishment

    —          (1,505     —     

Goodwill Impairment Charge

    —          55,000        —     

Disposition of Cumulative Translation Adjustment

    —          1,560        —     
                       

Adjusted EBITDA

  $ 103,178      $ 83,764      $ 119,920   
                       

 

(4) Adjusted EBITDA Margin is calculated by dividing our Adjusted EBITDA by our Revenue After Raw Materials Costs. We believe our Adjusted EBITDA Margin is useful in measuring our profitability and our control of cash operating costs relative to Revenue After Raw Materials Costs. Adjusted EBITDA Margin is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA Margin should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

 

(5) We separate our Capital Expenditures into two categories: (1) Growth Capital Expenditures and (2) Maintenance Capital Expenditures. We believe that Growth Capital Expenditures and Maintenance Capital Expenditures are useful in measuring our operating performance. We incur Growth Capital Expenditures in connection with the establishment of our operations at new customer sites, the performance of additional services or significant productivity improvements at existing customer sites. We incur Maintenance Capital Expenditures as part of our ongoing operations, and Maintenance Capital Expenditures generally include the cost of normal replacement of capital equipment used at existing sites on existing contracts, additional capital expenditures made in connection with the extension of an existing contract and capital costs associated with acquiring previously leased equipment. Growth Capital Expenditures and Maintenance Capital Expenditures are not recognized financial measures under GAAP and may not be comparable to similarly titled measures used by other companies in our industry. Growth Capital Expenditures and Maintenance Capital Expenditures should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

 

 

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The following table sets forth our total Capital Expenditures, Growth Capital Expenditures and Maintenance Capital Expenditures:

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 
Total Capital Expenditures      

Growth Capital Expenditures

  $ 26,966      $ 23,186      $ 9,475   

Maintenance Capital Expenditures

    35,886        15,792        31,158   

Capital Leases

    —          (1,343     (322

Total Mill Services acquired assets

    —          —          (495
                       

Total Capital Expenditures

  $ 62,852      $ 37,635      $ 39,816   
                       

 

(6) Free Cash Flow is calculated as our Adjusted EBITDA minus our Maintenance Capital Expenditures. We believe Free Cash Flow is useful in measuring our liquidity. Free Cash Flow is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Free Cash Flow should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

The following table sets forth our calculation of Free Cash Flow:

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 

Free Cash Flow

     

Adjusted EBITDA

  $ 103,178      $ 83,764      $ 119,920   

Maintenance Capital Expenditures

    (35,886     (15,792     (31,158
                       

Free Cash Flow

  $ 67,292      $ 67,972      $ 88,762   
                       

The following table reconciles Free Cash Flow to net cash provided by (used in) operating activities:

 

(dollars in thousands)

  Year ended
December 31,
2008
    Year ended
December 31,
2009
    Year ended
December 31,
2010
 

Free Cash Flow

  $ 67,292      $ 67,972      $ 88,762   

Maintenance Capital Expenditures

    35,886        15,792        31,158   

Cash interest expense

    (36,165     (35,383     (33,521

Cash income taxes

    (2,501     (2,461     (3,266

Change in accounts receivable

    39,202        (22,479     (42,652

Change in inventory

    26,386        (13,229     (6,799

Change in accounts payable

    (77,360     59,673        48,157   

Change in other current assets and liabilities

    (9,171     365        4,231   

Other operating cash flows

    (7,090     2,973        525   
                       

Net cash provided by operating activities

  $ 36,479      $ 73,223      $ 86,595   
                       

 

 

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RISK FACTORS

Investing in our class A common stock involves a high degree of risk. You should carefully consider the risks described below before making a decision to buy our class A common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, results of operations, financial condition or cash flows could be materially adversely affected. In that case, the trading price of our class A common stock could decline, and you might lose all or part of your investment in our class A common stock. In deciding whether to invest in our class A common stock, you should also refer to the other information set forth in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes.

Risks Relating to Our Business

North American and global steel production volumes and demand for steel are impacted by regional and global economic conditions and by conditions in our key end markets, including automotive, consumer appliance, general industrial and construction markets.

Global steel production volumes and the demand for steel in North America and worldwide is impacted by, and will continue to be impacted by, global economic conditions and conditions in key end markets, including automotive, consumer appliance, general industrial and construction markets. We derive a substantial portion of our Revenue After Raw Materials Costs from providing services to North American steel mills. Our Revenues After Raw Materials Costs and earnings are primarily driven by the volume of steel production at our customers’ mills; accordingly, declines in our customers’ production volumes have a direct negative impact on our Revenue After Raw Materials Costs and other results of operations.

Many factors may materially adversely affect production by our steel customers, including, but not limited to:

 

   

decreases in demand for steel or failure of demand to increase to the extent forecasted, particularly in key end markets, including automotive, consumer appliance, general industrial and construction markets;

 

   

failure of the economy to fully recover from the recession that commenced in 2008, or the advent of any future recessions; and

 

   

increases in imports of steel that may result in an oversupply of steel in North America, our largest market, and may displace our North American customers’ steel production, including increases resulting from changes in currency rates, import tariffs or other trade regulations.

We cannot predict the impact of global economic conditions and conditions in key end markets, such as automotive, consumer appliance, general industrial and construction markets, on the demand for and production of steel in North America and worldwide.

During a material economic downturn in the steel industry or due to company-specific events, some of our customers could experience financial difficulties and close operations or significantly decrease production permanently or for an extended period at sites that we service. The resulting decrease in business volumes could result in a decreased need for our services and materially adversely impact our business, financial condition, results of operations and cash flows. For example, during the first half of 2009, many of our customers significantly reduced or altogether stopped producing steel at certain facilities.

 

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We rely on a number of significant customers and contracts, the loss of any of which could have a material adverse effect on our results of operations.

For the year ended December 31, 2010, our largest customer, United States Steel (together with its affiliates), accounted for approximately 28% of our Revenue After Raw Materials Costs, and our top 10 customers accounted for 81% of our Revenue After Raw Materials Costs. A reduction in activity by a customer at one or more sites that we service (or its decision to idle or permanently close any customer site we service) would reduce the revenue we receive from such customer at those sites. A loss of a significant customer or the partial loss of a customer’s business through the termination or non-renewal of one of its significant contracts with us, or temporary or permanent shut down of one or more sites, could have a material adverse effect on our revenue and other results of operations. In general, our contracts are not terminable without cause. However, certain of our contracts, including contracts with our largest customers, contain provisions providing for the right to terminate for convenience through the payment of significant scheduled termination fees based on the remaining terms of the contracts. Further, notwithstanding our contractual rights, we may not have an effective remedy if one of our largest customers attempts to unilaterally change the terms in our contracts.

In addition, because our business is conducted under long-term contracts (often servicing the same steel company under separate, site-specific or service-specific contracts) and is highly dependent on business relationships, it could be very difficult to replace a current customer or contract with a new customer or contract. Even if we were to replace a significant customer or contract, we might not be able to find another customer or enter into a replacement contract that would provide us with comparable revenue. We may lose significant customers or contracts in the future, and any resulting losses could materially adversely affect results of operations. Contracts and contract renewals we enter into in the future may not include tiered pricing structures and/or minimum monthly fees, each of which stabilizes our revenue in the event of volume fluctuations.

Some of our operations are subject to market price and inventory risk arising from changes in commodity prices.

Although significant portions of our operations are more sensitive to changes in the volume of steel production than to changes in prices, certain of our operations subject us directly to price and/or inventory risk. In particular:

 

   

we routinely maintain a limited quantity of unsold scrap inventory;

 

   

there are occasions when we may purchase quantities of raw materials in excess of immediate sales commitments. Similarly, we may have contractual commitments to provide certain raw materials to customers without a corresponding right to purchase all of the materials required to fulfill our commitment;

 

   

we typically have the right to sell for our own account, subject to royalty payments to the host mill, slag and certain other co-products under our contracts; and

 

   

we generate a portion of our revenue in our raw materials procurement activities from procurement fees that can be influenced by changes in prices, market conditions and competition.

Our global raw materials procurement business is structured such that our purchases of raw materials are typically matched with customer orders, which minimizes inventory and price risk. However, we will from time to time take measured positions in raw materials inventory or experience a delay between the time all or a portion of the raw materials are purchased or sold by us and the time the raw materials are matched to customer purchase or sale orders. As a result, we may be subject to losses arising from changes in commodity prices.

If we are unable to manage inventory or price risk, our results of operations and profitability could be materially adversely affected.

 

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If we fail to make accurate estimates in bidding for long-term contracts, our profitability and cash flow could be materially adversely affected.

The majority of our Revenue After Raw Materials Costs is derived from customers’ sites where we have long-term contracts that typically have a term of five to 10 years. When bidding for a job, we are required to estimate the amount of production at a particular steel mill and the costs of providing services at that mill. In general, the higher the estimated volume of steel production at a customer site, the lower the unit price per volume of product handled or service provided that we can offer. Other estimates that will determine the unit price per volume that we can offer include local labor, transportation and equipment costs. If our volume estimates for a contract ultimately prove to be too high, or our cost estimates prove to be too low, our profitability and cash flows under that contract will be adversely affected.

Operating in various international jurisdictions subjects us to a variety of risks.

We currently operate in 14 countries, and during 2010 we derived approximately 19% of our Revenue After Raw Materials Costs from providing services and products to steel mills outside of North America. Due to the extensive diversification of our international operations, we are subject to a higher level of risk than some other companies relating to international conflicts, wars, internal civil unrest, trade embargoes and acts of terrorism. As we expand internationally, we will further become exposed to a variety of risks that may materially adversely affect results of operations, cash flows or financial position. These include the following:

 

   

periodic economic downturns in the countries in which we do business;

 

   

fluctuations in currency exchange rates;

 

   

customs matters and changes in trade policy or tariff regulations or other impositions of export restrictions;

 

   

imposition of or increases in currency exchange controls and hard currency shortages;

 

   

changes in regulatory requirements in the countries in which we do business;

 

   

labor relations and works’ council and other labor requirements;

 

   

higher tax rates and potentially adverse tax consequences, including restrictions on repatriating earnings, adverse tax withholding requirements and double taxation;

 

   

longer payment cycles and difficulty in collecting accounts receivable;

 

   

complications in complying with a variety of foreign laws and regulations;

 

   

political, economic and social instability, civil unrest, terrorism and armed hostilities in the countries in which we do business;

 

   

risk of nationalization of steel mills and/or cancellation of our contracts without adequate remedy;

 

   

inflation rates in the countries in which we do business;

 

   

laws in various international jurisdictions that limit the right and ability of subsidiaries to pay dividends and remit earnings to affiliated companies unless specified conditions are met;

 

   

risks arising from having our employees and equipment embedded at customer sites, such as risks relating to our ability to access or retrieve our equipment in the event a customer enters into an insolvency proceeding; and

 

   

uncertainties arising from local business practices, cultural considerations and international political and trade tensions.

 

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If we are unable to successfully manage the risks associated with our increasingly global business, our financial condition, cash flows and results of operations may be materially adversely affected.

Our international expansion strategy may be difficult to implement and may not be successful.

Beginning in 2006, we implemented a number of international initiatives to expand our global footprint to countries that we do not serve throughout Europe, Latin America and Asia. We cannot assure you that outsourcing will become a prevalent practice in these developing countries or that our initiatives will be successful. If we are able to expand into new international markets, we will further become exposed to a variety of risks and uncertainties that may materially adversely affect our results of operations, cash flows or financial position. These include all of the risks and uncertainties that we are currently exposed to in connection with our existing international operations, as well as risks and difficulties inherent in expanding to new jurisdictions, such as establishing new relationships and conducting business in legal and cultural climates with which we have limited or no experience. Furthermore, the success of our international growth strategy depends on our ability to attract key management with business contacts and favorable reputations in our target markets. We will also incur additional costs and expenses in connection with our efforts to execute an international growth strategy, and we cannot assure you that we will be profitable or successful in expanding our operations into new international markets. If we are unable to successfully manage the risks associated with the expansion of our operations into new international markets, our financial condition, cash flows and results of operations may be materially adversely affected.

Our business involves a number of personal injury and other operating risks, and our failure to properly manage these risks could result in liabilities not fully covered by insurance, and loss of future business and could have a material adverse effect on results of operations.

Our business activities involve certain operating hazards that can result in personal injury and loss of life, damage and destruction of operating equipment, damage to the surrounding areas, interruption or suspension of operations at a customer site and loss of revenue and future business. Under certain circumstances, we may be required to indemnify our customers against such losses even though we may not be at fault. While we have in place policies to minimize the risk of serious injury or death to our employees or other visitors to our operations, we may nevertheless be unable to avoid material liabilities for any such death or injury that may occur in the future, and these types of incidents may have a material adverse effect on our financial condition. Although we believe that we maintain adequate insurance against these risks, there can be no assurance that our insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or that we will be able to continue to obtain adequate insurance protection. A successful claim for damage resulting from a hazard for which we are not fully insured could materially adversely affect our results of operations. In addition, if a customer concluded that we were responsible for an accident at one of our customer sites that resulted in significant losses to them and/or an interruption or suspension of their operations, we could lose such customer’s business. Moreover, such events may adversely affect our reputation in the steel industry, which may make it difficult to renew or extend existing contracts or gain new customers.

We are subject to concentrated credit risk and could become subject to constraints on our ability to fund our planned capital investments and/or maintain adequate levels of liquidity and working capital under our senior secured ABL facility as a result of concentrated credit risk, declines in raw material selling prices or declines in steel production volumes.

As of December 31, 2010, our largest customer, United States Steel (together with its affiliates), accounted for 29% of our accounts receivable, and our top 10 customers accounted for 54% of our accounts receivable. We are party to multiple long-term contracts with many of our customers, including a number of contracts with United States Steel and its affiliates. Our relative concentration of significant customers, combined with the risk of customer financial difficulties and resulting impacts on us as described above, exposes us to concentrated credit risk or the risk of reduced borrowing capacity under our senior secured ABL facility. Further consolidation among any of the steel industry’s larger companies, many of which are our customers, could further increase the concentration of credit risk we face.

 

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If our customers suffer significant financial difficulty, they also may not pay us for work we perform or the products we procure, which could have a material adverse effect on our results of operations. It is possible that customers may reject their contractual obligations to us under bankruptcy laws or otherwise. Significant customer bankruptcies could further adversely impact our Revenue After Raw Materials Costs and increase our operating expenses by requiring larger provisions for bad debt. In addition, even when our contracts with these customers are not rejected, if customers are unable to meet their obligations on a timely basis, it could adversely impact our ability to collect receivables, the valuation of inventories and the valuation of long-lived assets of our business, as well as negatively affect the forecasts used in performing our goodwill impairment testing under FASB ASC Topic 350, Goodwill and Other Intangible Assets. Further, we may have to negotiate significant discounts and/or extended financing terms with these customers in such a situation, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition, depressed steel production could weaken demand for raw materials and result in reduced selling prices. While declines in raw material prices tend not to have a significant impact on our Adjusted EBITDA as they would tend to reduce both our revenue and our cost of raw materials roughly equally, declines in raw material prices will cause related declines in our accounts receivable and inventory balances, which form the collateral base for our senior secured ABL facility. While we cannot predict the level of any such further declines in the value of our collateral or the degree to which such declines would decrease availability under our senior secured ABL facility, these events could combine to constrain our ability to fund additional capital investments and maintain adequate levels of liquidity and working capital.

If we experience delays between the time we procure raw materials and the time we sell them, we could become subject to constraints on our ability to maintain adequate levels of liquidity and working capital.

Our global raw materials procurement business is structured such that our purchases of raw materials are typically matched with customer orders, which minimizes inventory and price risk. However, we will from time to time take measured positions in raw materials inventory or experience a delay between the time all or a portion of the raw materials are purchased or sold by us and the time the raw materials are matched to customer purchase or sale orders. As a result, our ability to fund additional capital investments and maintain adequate levels of liquidity and working capital could become constrained and this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our estimates of future production volumes may not result in actual revenue or translate into profits.

We have estimated future production volumes on the basis of our past experience under our existing customer relationships and the length of the terms of our existing contracts. However, such projected volumes may not be realized as revenue or, if realized, may not result in profits. As of December 31, 2010, and based on production volumes for the year ended December 31, 2010 and remaining contract terms, we estimate that our existing multi-year contracts will generate approximately $1.7 billion in future Revenue After Raw Materials Costs. These estimates are based on assumptions that may prove to be incorrect. Accordingly, investors should not place undue reliance on such estimates. Cancellation of contracts or other changes by our customers could significantly reduce the revenue and profit we actually receive from our contracts. In the event of a cancellation, we may be reimbursed for certain costs, but we typically have limited contractual rights to revenue for services not yet performed. Our customers’ future requirements and our estimates may prove to be unreliable. If our estimates of future production volumes fail to materialize, we could experience a reduction in revenue after materials costs and a decline in profitability, which would result in a deterioration of our financial condition, profitability and liquidity.

Counterparties to agreements with us may not perform their obligations.

We enter into agreements with various counterparties for the procurement of raw materials and provision of services. In the event of non-performance by a counterparty of its obligations under such contracts,

 

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we could incur losses as a result of our counterparty’s non-performance or otherwise incur costs in seeking the enforcement of our agreements. For example, a buyer of raw materials from our Raw Material and Optimization Group may seek to avoid its obligations if the cost of raw materials decreases significantly between the time of the order and fulfillment.

Exchange rate fluctuations or decreases in exports of steel may materially adversely impact our business.

Fluctuations in foreign exchange rates between the U.S. dollar and the other currencies in which we conduct business may materially adversely impact our operating income and income from continuing operations in any given fiscal period. Our operations in the United States accounted for approximately 75% of both our Revenue After Raw Materials Costs and Adjusted EBITDA for the year ended December 31, 2010. An increase in the value of the U.S. dollar relative to the foreign currencies in which we earn our revenues generally has a negative impact on operating income, whereas a decrease in the value of the U.S. dollar tends to have the opposite effect. Fluctuations in foreign exchange rates or decreases in exports of steel, including decreases resulting from the imposition of significant export restrictions, could also have an impact on demand for steel, the volume of global steel production and steel production in North America, as well as affect scrap pricing and procurement costs. If the exchange rates for foreign currencies change materially in relation to the U.S. dollar, our financial position, results of operations, or cash flows may be materially affected.

An increase in our debt service obligations may materially adversely affect our earnings and available cash and could make it more difficult to refinance our existing debt.

Our credit facilities include a senior secured ABL facility, a senior secured term loan credit facility and a senior secured synthetic letter of credit facility. As of December 31, 2010, our gross availability under the senior secured ABL facility was $164.3 million and we had no borrowings outstanding. Also on that date, $10.7 million face amount of letters of credit were issued against our senior secured ABL facility and $17.9 million face amount of letters of credit were issued under the senior secured synthetic letter of credit facility. Our subsidiary, Tube City IMS Corporation, issued senior subordinated notes due February 1, 2015, which are unsecured obligations subordinated in right of payment to all of Tube City IMS Corporation’s and its subsidiaries’ existing and future senior indebtedness but senior in right of payment to any future subordinated obligations. In addition, in November 2008, we began issuing series 2008 promissory notes to affiliates of Onex, members of our board of directors, management team and certain other employees. As of December 31, 2010, the aggregate amount outstanding in respect of the senior subordinated notes and the series 2008 promissory notes was $223.0 million and $42.2 million, respectively. We intend to redeem in full the series 2008 promissory notes with a portion of the net proceeds of this offering. See “Management’s Discussion and Analysis of Financial Condition—Liquidity and Capital Resources—Indebtedness.”

To secure amounts outstanding under our credit facilities, substantially all of the assets of our operating subsidiaries are pledged as security to the lenders. We expect to be able to repay the balance of our indebtedness and meet our other obligations through cash generated from operations. However, we may need to obtain new credit arrangements and other sources of financing in order to meet our future obligations and working capital requirements and to fund our future capital expenditures. Our ability to repay our outstanding debt and to fund our capital expenditures and other obligations depends on our successful financial and operating performance. Our ability to refinance our outstanding debt depends not only on our successful financial and operating performance, but also on the availability of funds from credit markets. There is no assurance that we will be able to refinance our debt on terms similar to those of our existing facilities.

An increase in our debt service obligations could materially adversely affect our earnings. Our debt service obligations could increase as a result of an increase in the amount outstanding under our senior secured ABL facility or by incurring new credit arrangements. Our debt service obligations could also increase as a result of an increase in interest rates. In addition, our senior secured ABL facility contains a consolidated fixed charge coverage covenant pursuant to which our fixed charge coverage ratio is not permitted to be less than 1.0 to 1.0 during any period where our excess availability under this facility is less than $15.0 million. For a description of our outstanding indebtedness, see “Description of Indebtedness.”

 

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The terms of our credit facilities and senior subordinated notes may restrict our current and future operations, particularly our ability to finance additional growth or take some strategic or operational actions.

Our credit facilities are secured by substantially all of the assets of our operating subsidiaries and contain, and any future refinancing or additional debt instruments likely would contain, significant operating and financial restrictions. In addition, the indenture governing the senior subordinated notes contains customary affirmative and negative covenants. These restrictions may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Among other things, the agreements limit our ability and the ability of our subsidiaries to:

 

   

incur additional indebtedness;

 

   

make loans and investments;

 

   

enter into sale and leaseback transactions;

 

   

incur liens;

 

   

declare or pay dividends or make other distributions, or repurchase or redeem capital stock or other equity interests;

 

   

make investments;

 

   

enter into transactions with affiliates;

 

   

sell assets or merge with or into other companies; and

 

   

make capital expenditures.

In addition, we may from time to time seek to refinance all or a portion of out debt or incur additional debt in the future. Any such future debt or other contracts could contain covenants more restrictive than those in our senior secured credit facilities and the indenture govering our senior subordinated notes. If we fail to satisfy our covenants, we will not be able to borrow under our senior secured credit facilities, and the lenders under our credit facilities could accelerate our debt and require immediate payment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

We expend significant funds and resources to embed ourselves at our customers’ sites, but we may not receive significant profits for a period of time following such efforts.

The development or expansion of our operations at our customer sites may involve a multi-year payback cycle. Depending on the scope of services that we provide, we could expend significant funds and resources in connection with newly-added sites or services before such efforts result in any significant profits. We refer to these funds as Growth Capital Expenditures. We continue to review possible opportunities for establishing operations at new customer sites that will generate additional profits, but those opportunities, particularly with respect to scrap handling, slag processing and surface conditioning also require significant Growth Capital Expenditures. For example, our cash flow used for capital additions in 2010 was $39.8 million, $9.5 million of which was used towards capital spending in connection with new contracts, agreements and arrangements or productivity improvements. While we typically make the bulk of our Growth Capital Expenditures after we enter into a final binding contract, we may make certain Growth Capital Expenditures during negotiations of the terms of a final binding contract and may not recover the Growth Capital Expenditures or realize any returns if no final contract is entered into.

 

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Increases in costs of maintenance and repair of our equipment or increases in energy prices could increase our operating costs and reduce profitability.

We incur significant maintenance expenses and Maintenance Capital Expenditures in connection with maintaining, repairing and replacing our mobile heavy equipment, including steel slab carriers, large earth moving front-end loaders/track loaders, pot carriers, pallet carriers, hydraulic/cable cranes, large off-highway trucks, magnetic separating and processing plants, surface conditioning machines and other equipment. These costs vary from year to year, and if such costs were to be higher than anticipated we could be required to incur significant expenses and make significant Maintenance Capital Expenditures, which could have a material adverse affect on our operating income, cash flows and results of operation. In addition, worldwide political and economic conditions and extreme weather conditions, among other factors, may result in an increase in the volatility of energy costs, both on a macro basis and for us specifically. We consume approximately eight to 11 million gallons of diesel fuel annually. To the extent that such costs cannot be passed to customers in the future on a timely basis or at all, whether as a result of contractual price adjustment mechanisms or otherwise, operating income and results of operations may be materially adversely affected.

Higher than expected claims under our self-insured health plans, under which we retain a portion of the risk, and our large deductible workers’ compensation program could adversely impact our results of operations and cash flows.

We self-insure our employees’ health insurance using a third-party administrator to process and administer claims. We have stop-loss coverage through an insurer that covers claim payments exceeding $175,000 per employee per year subject to a yearly aggregate deductible of $155,000. We maintain accruals for unpaid claims and claims incurred but not reported based on internal analysis of claims experience and actuarial calculations.

We also insure our workers’ compensation obligations under our large deductible workers’ compensation program. Under this program, the maximum exposure per claim is $1.0 million and stop-loss coverage is maintained for amounts above this limit. The aggregate maximum exposure is limited to a percentage of payroll for each open policy. We accrue for this expense in amounts that include estimates for incurred but not reported claims, as well as estimates for the ultimate cost of all known claims. We do not have funds on deposit with any third-party insurance company administering self-funded retentions, but we do secure these obligation with letters of credit.

At December 31, 2010, we had recorded liabilities of $4.6 million related to both asserted and unasserted health insurance and workers’ compensation claims. If actual claims are higher than those projected by management, an increase to our reserves for health insurance and workers’ compensation claims may be required and would be recorded as a charge to income in the period in which the need for the change was determined. Conversely, if actual claims are lower than those projected by management, a decrease to our insurance reserves may be required and would be recorded as a reduction to expense in the period in which the need for the change was determined.

We are exposed to work stoppages and increased labor costs resulting from labor union activity among our employees and those of our customers.

As of December 31, 2010, approximately 48% of our North American hourly employees are covered by 30 collective bargaining agreements. Labor agreements with these unions expire periodically through April 2015. Approximately 10% of our North American hourly employees are covered by collective bargaining agreements that expire before December 31, 2011. Our negotiations of new labor agreements with our union employees are time-consuming and subject to many factors outside of our control, and we may not be successful in such negotiations. Each regularly scheduled negotiation of labor agreements may result in increased labor costs. If we are unable to negotiate new terms with our unionized labor successfully as their contracts become due, we could experience a work stoppage, which could materially adversely impact our results of operations or, in the worst case scenario, lead to the termination of contracts with one or more of our significant customers.

 

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In addition, many of our customers have employees who are members of trade unions. Because our Service Revenue is primarily derived from steel mill production, a prolonged work stoppage or frequent work stoppages in our customers’ mills could cause a decline in production and a reduction in our revenue, profitability and cash flow.

We maintain strike interruption insurance coverage for certain of our sites to help protect us in the event of a labor stoppage by a customer’s union, but such insurance may not cover our losses or our losses may be in excess of our insurance coverage.

Our pension and other post-employment benefit plans are currently underfunded or unfunded and we have to make cash payments, which may reduce the cash available for our business.

As of December 31, 2010, the date the assets and liabilities of our plans were last actuarially computed, our pension plans were underfunded by a total of $5.6 million. We have made cash payments of approximately $2.3 million to the underfunded pension plans during the year ended December 31, 2010, which consists primarily of minimum contributions required by ERISA regulations and Canadian governmental authorities. The funded status of the plans may be adversely affected by the investment experience of the plans’ assets in both the United States and Canada, by any changes in the law either in the United States or Canada, and by changes in the statutory interest rates used by “tax-qualified” pension plans in the United States to calculate funding liability. Accordingly, if the performance of our plans’ assets does not meet our expectations, if there are changes to the U.S. Internal Revenue Service regulations or other applicable law or if other actuarial assumptions are modified, our future contributions to our underfunded pension plans could be higher than we expect.

In addition, we have contractual obligations pursuant to collective bargaining agreements to make payments for employees and could be required to provide additional benefits based on changes in participation in union defined benefit plans.

We also have certain post-employment benefit plans that provide health care benefits primarily to retired employees. The plans are not funded; we pay post-employment benefits as required for individual participants. During the year ended December 31, 2010, we paid $0.3 million of benefits under these plans and as of December 31, 2010, the date the liabilities were last actuarially computed, the plans’ liabilities totaled $6.6 million. If health care costs or other actuarial assumptions differ from our expectations, future benefit payments under these plans could be greater than anticipated.

Higher than expected claims that are in excess of the amount of our coverage under insurance policies would increase our costs.

While we maintain insurance policies to provide us with protection against a variety of contingencies, including general liability, workers’ compensation, property, automobile and directors and officers liability, we cannot assure you that the amount of such insurance will be sufficient to cover all liabilities we incur. If actual claims are in excess of the amount of insurance coverage that we have under these insurance policies, we would experience an increase in costs which could result in a material adverse effect on our business, financial condition, results of operations and cash flows.

Equipment failure or other events could cause business interruptions that could have a material adverse effect on our results of operations.

Our steel production support services depend on critical pieces of mobile heavy equipment, including steel slab carriers, large earth moving front-end loaders/track loaders, pot carriers, pallet carriers, hydraulic/cable cranes, large off-highway trucks, magnetic separating and processing plants, surface conditioning machines and

 

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other equipment. Such equipment may, on occasion, be out of service as a result of unanticipated failures, fires, explosions or adverse weather conditions. Due to the embedded nature of our operations, it may be expensive or impractical to relocate our assets and employees in the event of such service interruptions. In addition, unexpected equipment failures by our customers or our customers’ other vendors might result in temporary shutdowns or interruptions in their operations that, in turn, might result in reduction of the services we provide to these customers. We may also encounter business interruptions as a result of weather, blackouts and other catastrophic events. We also rely on various computer systems and software, including purchasing programs and enterprise resource programs, the failure of which to function properly could result in significant disruptions or other losses. Particularly as we grow and expand geographically, our equipment and systems may be costly to upgrade or repair. Because the significant majority of our Service Revenue and Revenue After Raw Materials Costs derives from volume of materials processed, business interruptions can have a material adverse effect on our results of operations.

Although we maintain business interruption insurance, any recovery under this insurance coverage may not fully offset the lost Revenue After Raw Materials Costs or increased costs that we may experience during the disruption of operations. In addition to the lost revenue that may not be recoverable through insurance, longer-term business disruption could result in a loss of customers. If this were to occur, future sales levels, and, therefore, our profitability could be materially adversely affected.

We are subject to acquisition risks. If we are not successful in integrating companies that we acquire or have acquired, we may not achieve the expected benefits and our profitability and cash flow could suffer. In addition, the cost of evaluating and pursuing acquisitions may not result in a corresponding benefit.

One of our growth strategies is to pursue strategic acquisitions and joint ventures, both domestically and internationally. Acquisition targets and joint ventures will be evaluated on their strategic fit with our business, their ability to be accretive to earnings and, with respect to international acquisitions, their potential to broaden our global footprint. As part of our international acquisition growth strategy, we acquired Auximetal, a sole-site provider of outsourced mill services to a steel mill outside of Marseille, France, in the first quarter of 2006, and we acquired Hanson Resource Management Limited (“Hanson”), a United Kingdom-based provider of industrial services to steel mills and other industrial enterprises, in the third quarter of 2008. In addition, in the first quarter of 2006, we purchased substantially all of the assets of U.S. Ferrous Trading, Inc., a bulk cargo raw materials procurement business.

We continue to consider strategic acquisitions and joint ventures, some of which may be larger than those previously completed and could be material to our business. Integrating acquisitions and joint ventures is often costly and may require significant attention from management. Delays or other operational or financial problems that interfere with our operations may result. If we fail to implement proper overall business controls for companies we acquire or fail to successfully integrate these acquired companies and joint ventures in our processes, our financial condition and results of operations could be materially adversely affected. In addition, it is possible that we may incur significant expenses in the evaluation and pursuit of potential acquisitions and joint ventures that may not be successfully completed. Other risks inherent in our acquisition and joint ventures strategy include diversion of management’s attention and resources, failure to retain key personnel and risks associated with unanticipated events or liabilities. In addition, in accordance with ASC Topic 350, Goodwill and Other Intangible Assets, we are required to evaluate goodwill for impairment at least annually or more frequently if events or circumstances exist that indicate that goodwill may be impaired. As a result of changes in circumstances after valuing assets in connection with acquisitions, we may be required to take write-downs of intangible assets, including goodwill, which could be significant.

Our business is subject to environmental regulations that could expose us to liability, increase our cost of operations and otherwise have a material adverse effect on our results of operations.

Our business and that of our customers and competitors are subject to extensive federal, state, local and foreign regulation related to the protection of the environment, including requirements concerning the handling, storage and disposal of hazardous materials and solid and hazardous wastes, air emissions, wastewater

 

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discharges, the investigation and cleanup of contaminated sites and occupational health and safety. We are heavily regulated and closely monitored by environmental agencies because of the high level of environmental risk associated with our operations and the operations of our customers. As a result, we have been involved from time to time in environmental regulatory or judicial proceedings. Certain of our operations may require permits for air emissions, wastewater discharges, or other environmental impacts. These permits may contain terms and conditions that impose limitations on our production levels and associated activities and periodically may be subject to modification, renewal and revocation by issuing authorities. If we are not in compliance with applicable environmental, health and safety requirements, or the permits required for our operations, or accidents or releases of hazardous materials occur in connection with our operations, we could be subject to material fines or penalties and, potentially, criminal sanctions, enforcement actions, compliance costs, 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 enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or interruptions or temporary shut downs of our operations which could have a material adverse effect on us. We could also face the risk of termination under our contracts for the facility where the violation occurred. Although we maintain contractors’ pollution liability insurance, we cannot assure you that the amount of such insurance will be sufficient to cover all liabilities we may incur.

Environmental laws regarding clean-up of contamination such as the federal Superfund law, in certain circumstances, impose joint and several liability, for the cost of investigation or remediation of contaminated sites upon the current site owners, the site owners and operators at the time the contamination occurred, and upon parties who sent waste to the facility for treatment or disposal, regardless of the lawfulness of the activity giving rise to the contamination. Such laws may expose us to liability for conditions caused by others or by our acts that were in compliance with all applicable laws at the time such acts were performed, including environmental conditions arising with respect to premises we no longer occupy. We may incur significant liabilities under cleanup laws and regulations 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 interpretation or enforcement of these laws and regulations, are constantly evolving. 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, financial condition and results of operations.

Further, we generate revenue from the sale of slag as aggregate for use in applications such as cement production, road construction, ballast, fill and agricultural applications. If applicable environmental laws or regulations prohibited the use of slag for these purposes, we could lose all or part of this revenue stream. See “Business—Regulatory Considerations—Environmental, Safety and Quality Matters.”

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some we may work with, may not be subject to these prohibitions. While we maintain policies that require compliance with these rules, we cannot assure you that our employees, agents or other business partners will not engage in such conduct for which we might be held responsible. If our employees, agents or other business partners are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

We may see increased costs arising from health care reform.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act were signed into law. This legislation may have a significant impact on health care providers,

 

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insurers and others associated with the health care industry. We are currently evaluating the impact of this comprehensive legislation on our self-insured health plans and our business, financial condition and results of operations. Federal and state governments may propose additional health care initiatives and revisions to the health care and health insurance systems. It is uncertain what legislative programs, if any, will be adopted in the future, what action Congress or state legislatures may take regarding other health care reform proposals or legislation, or what the effect any such legislative programs or actions may have on our business, financial condition and results of operations.

Rapidly growing supply in China and other developing economies may grow faster than demand in those economies, which may result in additional excess worldwide capacity and falling steel prices.

Over the last several years, steel consumption in China and other developing economies has increased at a rapid pace. Steel companies have responded by rapidly increasing steel production capability in those countries and published reports state that further capacity increases are likely. Because China is now the largest worldwide steel producer by a significant margin, any excess Chinese supply could have a major impact on world steel trade and prices if this excess production is exported to other markets. Since the Chinese steel industry is largely government owned, it has not been as adversely impacted by the recent global recession, and it can make production and sales decisions for non-market reasons. Falling steel prices impact our customers’ profitability and financial position.

A downgrade in our credit ratings could make it more difficult for us to raise capital and would increase the cost of raising capital.

If one or more of the major ratings agencies were to downgrade the ratings assigned to our outstanding debt, our ability to raise capital would become more difficult, our cost of raising capital would increase, the terms of any future borrowings by us would be affected, the terms under which we purchase goods and services might be affected, and our ability to take advantage of potential business opportunities would be impaired.

We face significant competition in the markets we serve.

The global outsourced steel services industry is highly competitive. Competition is based largely upon service quality, price, past experience, safety and environmental record and reputation. Certain of our competitors are companies or divisions or operating units of large companies that have greater financial and other resources than we do, and a potential customer could view that as an advantage for such a competitor. In North America, primary direct competitors include: Harsco Corporation, through its Harsco Metals division; Edward C. Levy Co.; Nucor Corporation, through its acquisition of the David J. Joseph Company; Stein Steel Mill Services, Inc.; Philip Services Corporation; Sims Metal Management and Phoenix Services, LLC, although most of our service categories include additional competitors. In Europe, Latin America and Asia, competitors include Harsco Metals, Phoenix Services, LLC, Edward C. Levy, BIS, Sims Metal Management, TSR Recycling and numerous regional service providers, including Gagneraud Industries SAS, Ortec Group, Getim, Recmix Belgium, DSU, Techint Group and Egon Evertz KG. In order to maintain competitiveness, we may be required to reduce our prices, structure the pricing of our contracts differently or make other concessions. Such actions could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we also compete with the internal steel production support service capabilities of some of our customers, and, in some cases, customers have replaced our services with internally provided support services. As a result, we may not be able to retain or renew our existing contracts, and we may not be able to continue to compete successfully with existing or new competitors. Any such failure could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may not be able to sustain our competitive advantages in the future.

We believe that our market advantage is based on our unique ability to provide a combination of leading levels of service, safety, cost-efficiency and technologically advanced products such as our Scrap OptiMiser® and GenBlend® software packages. However, there can be no guarantee that we can maintain our competitive

 

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advantage in these areas. Our significant competitors, such as other full-service providers of outsourced industrial services to steel mills and the in-house service capabilities of our customers, have the potential to offer a similar suite of services or improve service levels. From time to time, small, local steel service businesses may receive expansion financing and attempt to compete with us, particularly on the basis of price. In addition, as new methods of scrap optimization are developed or new technologies gain increased market acceptance, we may find ourselves competing with more technologically sophisticated market participants. It is also possible that new competitors or alliances among existing and new competitors may emerge and rapidly acquire significant market share. Any of the foregoing may make it more difficult for us to compete effectively by reducing our revenues, profit margins and market share. Furthermore, loss of potential customers resulting from our failure to compete effectively may materially adversely affect our financial condition, results of operations and cash flows.

Future conditions might require us to make substantial write-downs in our assets, including requiring us to incur goodwill impairment charges, which would materially adversely affect our balance sheet and results of operations.

Periodically, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In addition, we review goodwill and other intangibles not subject to amortization for impairment annually, or when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit could be lower than its carrying value. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings in our financial statements that could have a material adverse effect on our results of operations. During the second quarter of 2009, we revised our long-term forecast due to significant changes in expectations at two new customer sites with an existing customer where we had anticipated entering into final binding contracts but the expected contracts were not finalized. The resulting significant changes in expectations triggered the requirement to conduct a goodwill impairment test in advance of the annual evaluation date of October 1. We determined that the fair value of the net assets of the segment exceeded the fair value of the segment, and we therefore recorded an estimated impairment charge of $55.0 million. We continue to evaluate goodwill annually or if events or circumstances indicate that an impairment loss may have been incurred. If conditions in our business environment were to deteriorate, we may determine that certain of our assets were impaired, and we would be required to write off all or a portion of our costs for such assets. Any such significant write-offs or other impairment changes in the future could materially adversely affect our balance sheet and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies—Goodwill and Intangible Assets” and Note 11, Goodwill and Identifiable Intangible Assets to our consolidated financial statements included elsewhere in this prospectus.

We may be subject to potential asbestos-related and other liabilities associated with former businesses.

We and our former subsidiaries have been and may in the future be subject to asbestos-related personal injury claims relating to our predecessors, some as old as 100 years, and lines of business that we no longer own or operate, including liability related to subsidiaries that we have sold or spun off. Although we have various indemnities, contractual protections, insurance coverage and legal defenses with respect to asbestos-related claims related to our predecessors and former lines of business, we may incur material liability in connection with such claims if the indemnities and contractual protections fail, if our insurance coverage is exhausted or if a court does not recognize our legal defenses. The discovery of material liabilities relating to predecessors or former lines of business could have a material adverse effect on our business, financial condition or future prospects.

 

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Certain of our operations are dependent on access to freight transportation.

We rely on freight transportation to perform certain aspects of our business, and we could be unfavorably impacted by factors affecting transportation, including, but not limited to, the following:

 

   

Our inability to transport material on commercially reasonable terms if the preferred modes of transportation (i.e., barges, vessels, trucks, rail cars, etc.) are unavailable or uneconomical; and

 

   

We may incur demurrage or similar charges, which could be substantial in the event of a delay in loading cargo when scheduled.

If we did not have access to freight transportation on reasonable terms, our ability to operate our business could be materially adversely affected.

Our tax liabilities may substantially increase if the tax laws and regulations in the jurisdictions in which we operate change or become subject to adverse interpretations or inconsistent enforcement.

Taxes payable by companies in many of the countries in which we operate are substantial and include value added tax, excise duties, taxes on income (including profits and capital gains), payroll-related taxes, property taxes and other taxes. Tax laws and regulations in some of these jurisdictions may be subject to frequent change, varying interpretation and inconsistent enforcement. In addition, many of the jurisdictions in which we operate have adopted transfer pricing legislation. If tax authorities impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse effect on our results of operations and financial condition. It is possible that taxing authorities in the jurisdictions in which we operate will introduce additional revenue raising measures. The introduction of any such provisions may affect our overall tax efficiency and could result in significant additional taxes becoming payable. Any such additional tax exposure could have a material adverse effect on our results of operations and financial condition. We may face a significant increase in income taxes if tax rates increase or the tax laws or regulations in the jurisdictions in which we operate or treaties between those jurisdictions are modified in an adverse manner. This may materially adversely affect our cash flows, liquidity and ability to pay dividends.

Increased use of materials other than steel may have a material adverse effect on our business.

In many applications, steel competes with other materials, such as aluminum, cement, composites, glass, plastic and wood. Increased use of these materials in substitution for steel products could have a material adverse effect on prices and demand for our customers’ products. For example, U.S. Congress has raised the Corporate Average Fuel Economy (CAFE) mileage requirements for new cars and light trucks produced beginning in 2011. Automobile producers may reduce the steel content of cars and trucks to reduce their weight and help achieve the new Corporate Average Fuel Economy standards, reducing demand for steel or resulting in an over-supply in the United States.

Regulation of greenhouse gas emissions and climate change may materially adversely affect our operations and markets.

A number of governmental authorities and international bodies have introduced, implemented or are contemplating legislation or regulation in response to the potential impacts of greenhouse gas emissions or climate change. These legislations and regulations have, and may in the future, result in increasing regulation of greenhouse gas emissions, including the introduction of carbon emissions trading mechanisms, in jurisdictions in which we operate. These initiatives may result in increased future energy and compliance costs. These initiatives may be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. The additional costs to our suppliers could be passed along to us in the form of higher cost products and services and our customers could be forced to reduce or cease production at certain customer sites if

 

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regulatory costs made such operations uneconomic. Assessments of the potential impact of future climate change regulation are uncertain, given the wide scope of potential regulatory change in countries in which we operate. In addition, the potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances. These effects may materially adversely impact the cost, production and financial performance of our operations.

If we fail to protect our intellectual property and proprietary rights adequately or infringe the intellectual property of others, our business could be materially adversely affected.

We seek to protect our intellectual property through trade secrets, confidentiality, non-compete and nondisclosure agreements and other measures, some of which afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use information that is proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar or superior technology or design around our intellectual property. Our failure to protect adequately our intellectual property and proprietary rights could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may be sued for infringing the intellectual property rights of others or be subject to litigation based on allegations of infringement or other violations of intellectual property rights. Regardless of merits, intellectual property claims are often time-consuming and expensive to litigate and settle. In addition, to the extent claims against us are successful, we may have to pay substantive monetary damages or discontinue any of our products, services or practices that are found to be in violation of another party’s rights. We also may have to seek a license and make royalty payments to continue offering our products and services or following such practices, which may significantly increase our operating expense.

Risks Relating to the Offering and Ownership of Our Class A Common Stock

Public investors will experience immediate and substantial dilution as a result of this offering.

If you purchase shares of our class A common stock in this offering, you will immediately experience substantial dilution in net tangible book value. The initial public offering price of our class A common stock will be substantially higher than the net tangible book value per share of our class A common stock immediately following this offering. Therefore, if you purchase class A common stock in this offering, you will experience immediate and substantial dilution of your investment. Based upon the issuance and sale of                  shares of class A common stock by us at an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus), you will incur immediate dilution of approximately $             in the net tangible book value per share if you purchase shares of our class A common stock in this offering. In addition, we may raise additional capital through public or private equity or debt offerings, subject to market conditions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, you will experience further dilution.

In addition, following the offering, approximately                  shares of our class A common stock will be issuable upon the exercise of outstanding stock options. To the extent that these options are exercised, you will experience further dilution. For further information, see the “Dilution” and “Compensation Discussion and Analysis” sections of this prospectus.

After the expiration of certain resale restrictions, a significant portion of our outstanding shares of class A common stock may be sold into the market, which could adversely affect our stock price.

Sales of a substantial number of shares of our class A common stock in the public market could occur at any time following this offering, subject to certain securities law restrictions and the terms of contractual lock-up agreements. Sales of shares of our class A common stock, or the perception in the market that the holders of a

 

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large number of shares of class A common stock intend to sell shares, could reduce our stock price. Upon consummation of this offering, we will have outstanding                  shares of class A common stock. Of these shares, the shares of class A common stock offered hereby will be freely tradable without restriction in the public market, unless purchased by our affiliates. Upon completion of this offering, our existing stockholders will beneficially own                  shares of our common stock (                 shares if the underwriters exercise in full their option to purchase additional shares from us and the selling stockholders), which will represent approximately         % of our outstanding common stock (        % if the underwriters exercise in full their option to purchase additional shares from us and the selling stockholders). Immediately following the closing of this offering, the holders of approximately                  shares of common stock (                 shares if the underwriters exercise in full their option to purchase additional shares from us and the selling stockholders) will be entitled to dispose of their shares pursuant to Rule 144 under the Securities Act of 1933, or Securities Act, and following the expiration of the 180-day underwriter “lock-up” period. Merrill, Lynch, Pierce, Fenner & Smith Incorporated is entitled to waive the underwriter lock-up provisions at its discretion prior to the expiration dates of such lock-up agreements. Concurrently with this offering, we will award options to purchase                  shares of our class A common stock pursuant to our Long-Term Incentive Plan. In addition, following this offering, we intend to file a registration statement on Form S-8 under the Securities Act with the SEC to register                  shares of our class A common stock reserved for issuance under our Long-Term Incentive Plan. If certain of our existing stockholders were to sell a substantial portion of the shares they hold, our stock price could decline. See “Underwriting” and the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sale upon completion of this offering.

Our stock price may be volatile, and you may be unable to resell your shares at or above the initial public offering price or at all.

The initial public offering price for our shares was determined through negotiations between us and the underwriters and may not be indicative of the market prices that will prevail in the trading market. Our stock price may decline below the initial offering price, and you may not be able to sell your shares of our class A common stock at or above the price you paid in this offering, or at all. Our stock price 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 variations in our operating results from quarter to quarter;

 

   

actual or anticipated variations in our operating results from the expectations of securities analysts and investors;

 

   

actual or anticipated variations in our operating results from our competitors;

 

   

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

 

   

sales of class A common stock or other securities by us or our stockholders in the future;

 

   

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

   

departures of key executives or directors;

 

   

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, financing efforts or capital commitments;

 

   

delays or other changes in our expansion plans;

 

   

involvement in litigation or governmental investigations;

 

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

 

   

general market conditions in our industry and the industries of our customers;

 

   

general economic and stock market conditions;

 

   

regulatory or political developments; and

 

   

terrorist attacks or natural disasters.

Furthermore, the capital markets have recently experienced extreme price and volume fluctuations that have affected and continue to 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, interest rate changes or international currency fluctuations, may negatively impact our stock price. Trading price fluctuations may also make it more difficult for us to use our class A common stock as a means to make acquisitions or to use options to purchase our class A common stock to attract and retain employees. If our stock price after this offering does not exceed the initial public offering price, you may not realize any return on 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 materially adversely affect our business, results of operations and financial position.

No public market currently exists for our class A common stock, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our class A common stock. Although we have applied to have our class A common stock listed on the NYSE, an active public trading market for our class A common stock may not develop or be sustained after this offering. The lack of an active market may impede your ability to sell your shares at the time you wish to sell them, at a price that you consider reasonable or at all. The lack of an active market also may reduce our stock price and impede our ability to acquire other companies using our shares as consideration.

Our stock price and trading volume could decline if securities or industry analysts do not publish research or reports about our business or if they publish misleading or unfavorable research or reports about our business.

The trading market for our class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts commence coverage of our class A common stock, the trading price and liquidity for our shares could be adversely impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases to cover us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Because we do not intend to pay dividends on our class A common stock, you will benefit from an investment in our common stock only if it appreciates in value.

We do not anticipate paying any dividends to our stockholders for the foreseeable future. The agreements governing the indebtedness of our operating subsidiaries also restrict our ability to pay dividends. Accordingly, you may need to sell your class A common stock in order to generate cash flow from your investment. If our stock price after this offering does not exceed the initial public offering price, you may not

 

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realize any return on your investment in us and may lose some or all of your investment. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations and financial condition, restrictions imposed by applicable law and contracts to which we are a party and other factors our board of directors deems relevant. Investors seeking cash dividends should not invest in our class A common stock.

We will have broad discretion in applying the net proceeds of this offering, and we may not use those proceeds in ways that will enhance the market value of our common stock.

Our management will retain broad discretion to allocate the net proceeds to us of this offering. The net proceeds may be applied in ways with which you and other investors in the offering may not agree or which do not increase the value of your investment. We intend to use our net proceeds from this offering for the redemption in full of our series 2008 promissory notes and for general corporate purposes, which may include the acquisition of other businesses, products or technologies. We have not allocated these net proceeds for any specific purposes. Our management may not be able to yield a significant return, if any, on any investment of these net proceeds. We will not receive any of the proceeds from the sale of the shares of our class A common stock by the selling stockholders.

We will incur increased costs and our management will face increased demands as a result of operating as a company with public equity.

As a company with public equity, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as related rules implemented by the SEC, NYSE and FINRA, impose various requirements on companies with public equity. As a public company, we will be required to:

 

   

prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NYSE and FINRA rules;

 

   

create or expand the roles and duties of our board of directors and committees of the board;

 

   

institute more comprehensive financial reporting and disclosure compliance functions;

 

   

supplement our internal accounting and auditing function;

 

   

enhance and formalize closing procedures at the end of our accounting periods;

 

   

enhance our investor relations function;

 

   

establish new or enhanced internal policies, including those relating to disclosure controls and procedures; and

 

   

involve and retain to a greater degree outside counsel and accountants in the activities listed above.

Our management and other personnel will need to devote a substantial amount of time to these compliance matters. Also, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly than would be the case for a private company. For example, we expect these rules and regulations to make it more expensive for us to maintain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

In addition, as a result of becoming a public company, we will be subject to financial reporting and other requirements that will be burdensome and costly. We may not timely complete our analysis of these reporting requirements, which could adversely affect investor confidence in our company and, as a result, the

 

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value of our common stock. If we fail to implement these reporting requirements, our ability to report our results of operations on a timely and accurate basis could be impaired.

Delaware law, our charter documents and our debt documents may impede or discourage a takeover, which could adversely affect our stock price.

Our certificate of incorporation and bylaws have provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult, including the following:

 

   

our certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued preferred stock, without any vote or action by our stockholders; and

 

   

stockholders are denied the right to cumulate votes in the election of directors because our certificate of incorporation does not expressly permit cumulative voting.

In addition, our credit facilities and senior subordinated notes contain covenants that may impede, discourage or prevent a takeover of us. For instance, upon a change of control of us, we may be required to repurchase all of our outstanding senior subordinated notes and we would default on our credit facilities. As a result, a potential takeover may not occur unless sufficient funds are available to repay our outstanding debt.

These provisions of our charter documents, the Delaware General Corporation Law and our debt documents, alone or together, could delay or deter hostile takeovers and changes of control or changes in our management. Any provision of our amended and restated certificate of incorporation, bylaws or the Delaware General Corporation Law or our debt documents that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our class A common stock. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect our stock price if they are viewed as discouraging takeover attempts in the future.

We are a “controlled company,” controlled by a control group, whose interests in our business may be different from yours.

We are a “controlled company” within the meaning of the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain NYSE corporate governance requirements.

Upon completion of this offering, Onex and its affiliates will own approximately              shares of our class B common stock. Our class A common stock has one vote per share, while our class B common stock has ten votes per share on all matters to be voted on by our stockholders. Upon completion of this offering, Onex and its affiliates will control approximately     % of the combined voting power of our outstanding class A common stock and class B common stock (    % if the underwriters exercise in full their option to purchase additional shares). As a result, Onex and its affiliates will, for the foreseeable future, have significant influence over our management and affairs, and will be able to control virtually all matters requiring stockholder approval, including the election and removal of directors, the adoption or amendment of our certificate of incorporation and bylaws, possible mergers, corporate control contests and significant corporate transactions. The directors so elected will have the authority, subject to the terms of our indebtedness and the rules and regulations of the NYSE, to appoint or replace our senior management, cause us to issue additional shares of our class A common stock or repurchase class A common stock, declare dividends or take other actions. Onex and its affiliates may make decisions regarding our company and business that are opposed to other stockholders’ interests or with which they disagree. Onex and its affiliates may also delay or prevent a change of control of us, even if that change of control would benefit our stockholders, which could deprive you of the opportunity to receive a

 

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premium for your class A common stock. The significant concentration of stock ownership and voting power may adversely affect the trading price of our class A common stock due to investors’ perception that conflicts of interest may exist or arise. To the extent that the interests of our public stockholders are harmed by the actions of Onex and its affiliates, the price of our class A common stock may be harmed. Gerald W. Schwartz, the Chairman, President and Chief Executive Officer of Onex Corporation, owns shares representing a majority of the voting rights of the shares of Onex Corporation. For information regarding the ownership of our outstanding stock, please see the section titled “Principal and Selling Stockholders” and “Description of Capital Stock.”

Additionally, Onex is in the business of making investments in companies and may from time to time in the future acquire controlling interests in businesses that complement or directly or indirectly compete with certain portions of our business. Further, if Onex pursues such acquisitions in our industry, those acquisition opportunities may not be available to us. We urge you to read the discussions under the headings “Principal and Selling Stockholders” and “Certain Relationships and Related Transactions” for further information about the equity interests held by Onex and its affiliates and members of our senior management.

Because our board of directors is not required to consist of a majority of independent directors, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Onex will have a controlling influence over our board, and the interests of Onex may conflict with the interests of our other stockholders.

Because Onex and its affiliates will own class B common stock representing more than 50% of our voting power after giving effect to this offering, we will be considered a “controlled company” for the purposes of the NYSE listing requirements. As such, we are permitted to, and have, opted out of the corporate governance requirements that our board of directors and our compensation committee meet the standard of independence established by the NYSE. As a result, our board of directors and compensation committee may have more directors who do not meet the NYSE independence standards than they would if those standards were to apply. In particular, although our current board includes certain “independent directors,” so long as we are a “controlled company,” we will be exempt from the NYSE rule that requires that a board be comprised of a majority of “independent directors.” As a result, Onex will have a controlling influence over our board, as Onex will have sufficient voting power to elect the entire board, and our certificate of incorporation permits stockholders to remove directors at any time with or without cause. In addition, although we have established a nominating and corporate governance committee, we have opted out of the NYSE’s requirement that such committee contain independent directors. You will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE, and circumstances may occur in which the interests of Onex and its affiliates could conflict with the interests of our other stockholders.

 

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FORWARD-LOOKING STATEMENTS

This prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements relating to our business and financial outlook that are based on our current expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue” or other comparable terminology. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances.

Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute to such differences including:

 

 

North American and global steel production volumes and demand for steel are impacted by regional and global economic conditions and by conditions in our key end-markets, including automotive, consumer appliance, general industrial and construction markets;

 

 

we rely on a number of significant customers and contracts, the loss of any of which could have a material adverse effect on our results of operations;

 

 

some of our operations are subject to market price and inventory risk arising from changes in commodity prices;

 

 

if we fail to make accurate estimates in bidding for long-term contracts, our profitability and cash flow could be materially adversely affected;

 

 

operating in various international jurisdictions subjects us to a variety of risks;

 

 

our international expansion strategy may be difficult to implement and may not be successful;

 

 

our business involves a number of personal injury and other operating risks, and our failure to properly manage these risks could result in liabilities not fully covered by insurance and loss of future business and could have a material adverse effect on results of operations;

 

 

we are subject to concentrated credit risk and we could become subject to constraints on our ability to fund our planned capital investments and/or maintain adequate levels of liquidity and working capital under our senior secured ABL facility as a result of concentrated credit risk, declines in raw material selling prices or declines in steel production volumes;

 

 

if we experience delays between the time we procure raw materials and the time we sell them, we could become subject to constraints on our ability to maintain adequate levels of liquidity and working capital;

 

 

our estimates of future production volumes may not result in actual revenue or translate into profits;

 

 

counterparties to agreements with us may not perform their obligations;

 

 

exchange rate fluctuations or decreases in exports of steel may materially adversely impact our business;

 

 

an increase in our debt service obligations may materially adversely affect our earnings and available cash and could make it more difficult to refinance our existing debt;

 

 

the terms of our credit facilities and senior subordinated notes may restrict our current and future operations, particularly our ability to finance additional growth or take some strategic or operational actions;

 

 

we expend significant funds and resources to embed ourselves at our customers’ sites, but we may not receive significant profits for a period of time following such efforts;

 

 

increases in costs of maintenance and repair of our equipment or increases in energy prices could increase our operating costs and reduce profitability;

 

 

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higher than expected claims under our self-insured health plans, under which we retain a portion of the risk, and our large deductible workers’ compensation program could materially adversely impact our results of operations and cash flows;

 

 

we are exposed to work stoppages and increased labor costs resulting from labor union activity among our employees and those of our customers;

 

 

our pension and other post-employment benefit plans are currently underfunded or unfunded and we have to make cash payments, which may reduce the cash available for our business;

 

 

higher than expected claims that are in excess of the amount of our coverage under insurance policies would increase our costs;

 

 

equipment failure or other events could cause business interruptions that could have a material adverse effect on our results of operations;

 

 

we are subject to acquisition risks. If we are not successful in integrating companies that we acquire or have acquired, we may not achieve the expected benefits and our profitability and cash flow could suffer. In addition, the cost of evaluating and pursuing acquisitions may not result in a corresponding benefit;

 

 

our business is subject to environmental regulations that could expose us to liability, increase our cost of operations and otherwise have a material adverse effect on our results of operations;

 

 

failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences;

 

 

we may see increased costs arising from health care reform;

 

 

rapidly growing supply in China and other developing economies may grow faster than demand in those economies, which may result in additional excess worldwide capacity and falling steel prices;

 

 

a downgrade in our credit ratings could make it more difficult for us to raise capital and would increase the cost of raising capital;

 

 

we face significant competition in the markets we serve;

 

 

we may not be able to sustain our competitive advantages in the future;

 

 

the future success of our business depends on retaining existing and attracting new key personnel;

 

 

future conditions might require us to make substantial write-downs in our assets, including requiring us to incur goodwill impairment charges, which could materially adversely affect our balance sheet and results of operations;

 

 

we may be subject to potential asbestos-related and other liabilities associated with former businesses;

 

 

certain of our operations are dependent on access to freight transportation;

 

 

our tax liabilities may substantially increase if the tax laws and regulations in the jurisdictions in which we operate change or become subject to adverse interpretations or inconsistent enforcement;

 

 

increased use of materials other than steel may have a material adverse effect on our business;

 

 

regulation of greenhouse gas emissions and climate change issues may materially adversely affect our operations and markets; and

 

 

if we fail to protect our intellectual property and proprietary rights adequately or infringe the intellectual property of others, our business could be materially adversely affected.

You should review this prospectus carefully, including the section captioned “Risk Factors,” for a more complete discussion of the risks of an investment in our class A common stock.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of              shares of class A common stock in this offering will be approximately $             million to us and approximately $             million to the selling stockholders, based upon an assumed initial public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus) and after paying underwriting discounts and commissions and other estimated expenses of the offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders to the underwriters.

We intend to use the net proceeds of this offering as follows:

 

   

$             million to redeem in full our series 2008 promissory notes, which had an outstanding principal balance of $42.2 million as of December 31, 2010, which currently bears pay-in-kind interest at a rate of 8.0% per annum and which mature November 26, 2020. See “Description of Indebtedness;” and

 

   

the remainder for general corporate purposes, including capital expenditures and working capital.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, respectively, the proceeds to us from this offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

DIVIDEND POLICY

We have not declared or paid dividends on our common stock since our incorporation in October 2006, and we do not anticipate declaring or paying any dividends to our stockholders in the foreseeable future. In addition, our ability to pay dividends is restricted by certain covenants contained in the agreements governing our subsidiaries’ senior secured asset-based loan, senior secured term loan and senior subordinated notes and may be further restricted by any future indebtedness that we incur.

Our business is conducted through our subsidiaries. Dividends from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries.

 

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SHARE RECAPITALIZATION

Prior to or in connection with the offering, we will have completed a share recapitalization, referred to herein as the “Share Recapitalization,” which involves:

 

   

the creation of two classes of common stock by amending our certificate of incorporation, and the recapitalization of all              of our shares of common stock then outstanding into              shares of class B common stock, which was effective as of             , 2011;

 

   

a     -for-one split of shares of our class B common stock, which was effective on             , 2011; and

 

   

the conversion of all outstanding shares of our class A preferred stock into             shares of our class B common stock concurrently with the completion of this offering.

The              shares of our class B common stock issuable upon conversion of our class A preferred stock assumes a conversion date of             , 2011 and a conversion price of $             (which is the mid-point of the price range set forth on the front cover page of this prospectus). Concurrently with this initial public offering, each share of our class A preferred stock will convert into the number of shares of class B common stock equal to the liquidation value of such share of class A preferred stock at the time of conversion, plus accrued but unpaid dividends, divided by the public offering price per share of class A common stock in this offering. A $1.00 increase in the assumed initial public offering price of $             per share would decrease the number of shares of class B common stock issuable upon the conversion of the class A preferred stock by approximately             shares, and a $1.00 decrease in the assumed initial public offering price would increase the number of shares of class B common stock issuable upon the conversion of the class A preferred stock by approximately             shares.

Each share of our class B common stock is convertible into one share of class A common stock at the option of the holder. Additionally, each share of our class B common stock will convert automatically into a share of our class A common stock upon a transfer thereof to any person other than the holders of our class B common stock on the date of the consummation of this offering or their respective affiliates. Any shares of class B common stock sold by any stockholder in this offering will automatically convert to class A common stock upon their inclusion in this offering.

Our class A common stock and class B common stock vote as a single class on all matters, except as otherwise provided in our restated certificate of incorporation or as required by law, with each share of class A common stock entitling its holder to one vote and, prior to the Transition Date (as defined below), each share of class B common stock entitling its holder to ten votes. If the Transition Date occurs, the number of votes per share of class B common stock will be reduced automatically to one vote per share. The “Transition Date” will occur when the total number of outstanding shares of class B common stock is less than 10% of the total number of shares of class A common stock and class B common stock outstanding. See “Description of Capital Stock.”

After giving effect to this offering, holders of our class B common stock will control             % of the combined voting power of our outstanding common stock. See “Principal and Selling Stockholders” and “Description of Capital Stock.”

 

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CAPITALIZATION

The following table sets forth our capitalization at December 31, 2010:

 

 

on an actual basis; and

 

 

on a pro forma as adjusted basis to give effect to: (1) our Share Recapitalization, including the conversion of our class A preferred stock into                  shares of our class B common stock concurrently with this offering; and (2) the sale of shares of our class A common stock offered by us in this offering, in each case, at an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the front cover page of this prospectus) and after paying the underwriting discount and commissions and other estimated expenses of the offering, and the application of the net proceeds therefrom as described under “Use of Proceeds.”

 

    As of December 31, 2010  
  Actual     Pro Forma
As Adjusted
 
  (unaudited)  
  (dollars in thousands)  

Cash and cash equivalents

  $ 49,492     
               

Revolving borrowings

   

Senior secured ABL facility (1)

    —       

Other revolving borrowings

    304     
         

Total revolving borrowings

    304     
         

Current maturities of long-term debt

    3,185     
               

Long-term debt

   

Senior secured term loan credit facility

    157,162     

Senior subordinated notes

    223,000     

Indebtedness to related parties (2)

    42,155     

Capital lease obligations and other

    835     
               

Total long-term debt, including capital lease obligations

    423,152     
               

Total debt

    426,641     

Redeemable preferred stock

   

Preferred stock,                  shares authorized, with                  class A convertible shares and                  class B shares

   

Class A, $0.001 par value,                  shares, issued and outstanding actual, liquidation preference of $296,844 at December 31, 2010; no shares outstanding pro forma as adjusted

    296,844     

Class B, $0.001 par value, no shares issued and outstanding, at December 31, 2010 actual or pro forma as adjusted

    —       

Preferred stock, $0.001 par value;
Authorized—                 shares
Issued and outstanding—no shares at December 31, 2010 actual and pro forma as adjusted

    —       
               

Total redeemable preferred stock

    296,844     

Stockholders’ equity (deficit)

   

Common stock, $0.001 par value;
Authorized—50,000 shares
Issued and outstanding—23,835 shares at December 31, 2010 actual; no shares pro forma as adjusted

    —       

Class A common stock, $0.001 par value;
Authorized—             shares
Issued and outstanding—no shares at December 31, 2010 actual;              shares pro forma as adjusted

    —       

Class B common stock, $0.001 par value;
Authorized—             shares
Issued and outstanding— no shares at December 31, 2010 actual;              shares pro forma as adjusted

    —       

Capital in excess of par value

    —       

Accumulated deficit

    (165,717  

Accumulated other comprehensive income (loss)

   
(5,502

 
               

Total TMS International Corp. stockholders’ deficit

    (171,219  

Noncontrolling interest

    266     
               

Total stockholders’ equity (deficit)

    (170,953  
               

Total capitalization

  $ 552,532     
               

 

(1) As of December 31, 2010, we had $153.6 million of excess availability under our $165.0 million senior secured ABL facility.
(2) Consists of our series 2008 promissory notes issued to Onex, our senior management team, certain members of our board of directors and other employees. See “Description of Indebtedness—Indebtedness to Related Parties.”

 

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You should read this table in conjunction with “Use of Proceeds,” “Share Recapitalization,” “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes to the consolidated financial statements included elsewhere in this prospectus.

We expect that a $1.00 increase or decrease in the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the front cover page of this prospectus) would increase or decrease, respectively, the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our class A common stock in this offering, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our class A common stock and the net tangible book value per share of our common stock after this offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

Our net tangible book value as of December 31, 2010 was a deficit of $284.6 million, or $     per share, not taking into account the conversion of our outstanding class A preferred stock into class B common stock. Our net tangible book value per share on that date was equal to the sum of our total assets of $875.9 million less intangible assets of $407.4 million less total liabilities of $753.0 million, divided by the number of shares of our common stock outstanding. Assuming the completion of this offering on                 , 2011, and a conversion price of $     (the mid-point of the price range set forth on the front cover page of this prospectus), our class A preferred stock will convert into      shares of our class B common stock concurrently with this offering. After taking into account the automatic conversion of all of our outstanding shares of class A preferred stock into class B common stock concurrently with the completion of this offering, our net tangible book value per share of our class A common stock and class B common stock, taken together, as of December 31, 2010 was approximately $     per share. See “Prospectus Summary—The Offering,” “Share Recapitalization,” and “Description of Capital Stock” for a description of the conversion of our class A preferred stock.

Dilution in net tangible book value per share represents the difference between the amount paid by investors in this offering and the net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to the conversion of all of our class A preferred stock and the receipt and our intended use of approximately $     million of estimated net proceeds from our sale of      shares of class A common stock in this offering at an assumed initial public offering price of $     per share, the mid-point of the price range set forth on the front cover page of this prospectus, our net tangible book value as of December 31, 2010 would have been approximately $     million, or $     per share. This represents an immediate increase in net tangible book value of $     per share to existing stockholders and an immediate dilution of $     per share to new investors purchasing shares of class A common stock in this offering. The following table illustrates this substantial and immediate dilution to new investors on a per share basis:

 

Expenses

   Amount  

Assumed initial public offering price per share

   $                

Net tangible book value per share as of December 31, 2010, after conversion of series A convertible preferred stock

  
        

Increase in net tangible book value per share attributable to new investors

  
        

Adjusted net tangible book value per share after this offering

  
        

Dilution per share to new investors

   $     
        

A $1.00 increase or decrease in the assumed initial public offering price of $     per share (the mid-point of the price range set forth on the front cover page of this prospectus) would increase or decrease, respectively, our net tangible book value by $    , the net tangible book value per share after this offering by $     and the dilution per share to new investors by $    , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, as of December 31, 2010, the weighted average price per share paid by existing stockholders and by new investors who purchase shares of class A common stock in this offering at the assumed initial public offering price of $             per share (the mid-point of the price range set forth on the front cover page of this prospectus) after giving effect to:

 

   

our Share Recapitalization, including the conversion of all of our class A preferred stock into class B common stock;

 

   

this offering;

 

   

the total number of shares of class A common stock purchased from us in this offering; and

 

   

the total consideration paid to us before deducting underwriting discounts and commissions of $             and estimated offering expenses of approximately $            .

 

     Shares Purchased     Total Consideration     Weighted
Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Assuming no exercise of the overallotment option:

            

Existing stockholders

               $                             $                

New investors

            

Total

        100.0        100.0  

Assuming full exercise of the overallotment option:

            

Existing stockholders

               $                  $     

New investors

            

Total

        100.0        100.0  

The foregoing discussion and tables are based on              shares of class B common stock outstanding as of December 31, 2010 and do not reflect proceeds to be realized by existing stockholders in connection with the sales by them in this offering or the              shares of class A common stock reserved for issuance or options to purchase              shares of class A common stock to be granted concurrently with or after this offering pursuant to our Long-Term Incentive Plan. The options to be granted concurrently with this offering will have an exercise price equal to the public offering price of the class A common stock. Options granted after this offering will have an exercise price equal to the fair market value of a share of class A common stock on the date of grant.

We may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected consolidated historical statement of operations data for the years ended December 31, 2010, 2009 and 2008, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated historical statement of operations data for the period from January 26, 2007 to December 31, 2007 and the period from January 1, 2007 to January 25, 2007 and for the year ended December 31, 2006 have been derived from our audited consolidated financial statements not included in this prospectus.

The balance sheet data as of December 31, 2010 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 2007 has been derived from our unaudited financial statements not included in this prospectus. The balance sheet data as of December 31, 2008, January 25, 2007 and December 31, 2006 have been derived from our audited consolidated financial statements not included in this prospectus.

TMS International Corp., which after the Onex Acquisition is referred to as the Successor Company, was formed for the purpose of acquiring the Predecessor Company. The operations of the Successor Company prior to the Onex Acquisition were insignificant relative to those of the Predecessor Company during the same period. Accordingly, the selected historical consolidated financial data show the results of the Predecessor Company prior to the completion of the Onex Acquisition on January 25, 2007 and the results of the Successor Company and its subsidiaries after the Onex Acquisition.

The Onex Acquisition was accounted for using the purchase method, which resulted in an increase in property, plant and equipment to its then estimated fair values. The Onex Acquisition also resulted in an increase in identifiable amortizable intangible assets. Accordingly, Depreciation and Amortization expense increased in periods after the transaction. For the year ended December 31, 2010, Depreciation expense associated with the Onex Acquisition was approximately $2.6 million and Amortization of intangible assets acquired in the Onex Acquisition amounted to approximately $11.7 million.

The selected consolidated financial data set forth below should be read together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated historical financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

    Predecessor Company           Successor Company  

(dollars in thousands,

except per share data)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 

Statement of Operations Data:

               

Revenue:

               

Revenue from Sale of Materials

  $ 1,043,103      $ 74,592          $ 1,236,778      $ 2,595,608      $ 986,304      $ 1,629,119   

Service Revenue

    332,496        20,569            338,109        387,305        312,035        401,511   
                                                   

Total Revenue

    1,375,599        95,161            1,574,887        2,982,913        1,298,339        2,030,630   
 

Costs and Expenses:

               

Cost of Raw Materials Shipments

    998,120        71,629            1,188,011        2,515,425        939,993        1,564,504   

Site Operating Costs

    242,537        17,916            248,987        298,394        233,120        293,003   

Selling, General and Administrative Expenses

    43,792        4,988            45,686        56,750        44,638        53,139   

Provision for (Recovery of) Bad Debts

    167        4            445        9,166        (5,419     64   

Compensation Provided as a Result of Business Combinations(1)

    —          18,631            —          —          —          —     

Expenses Associated with Withdrawn Public Offerings

    2,734        —              —          —          —          —     

Provision for Transition Agreement

    —          —              —          —          2,243        —     

Depreciation

    48,045        3,287            59,177        61,108        57,567        49,317   

Amortization

    7,211        507            11,207        11,972        12,193        12,191   
                                                   

Total Costs and Expenses

    1,342,606        116,962            1,553,513        2,952,815        1,284,335        1,972,218   
                                                   

Income (Loss) from Operations

    32,993        (21,801         21,374        30,098        14,004        58,412   

 

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Table of Contents
    Predecessor Company           Successor Company  

(dollars in thousands,
except per share data)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

(Loss) Gain on Debt Extinguishment

    —          —              —          —          1,505        —     

Goodwill Impairment

    —          —              —          —          (55,000     —     

Disposition of Cumulative Translation Adjustment

    —          —              —          —          (1,560     —     

Interest Expense, Net

    (33,941     (2,483         (38,211     (38,079     (44,825     (40,361

Income (Loss) from Equity Investments

    (5     —              —          —          —          —     

Other Income

    —          613            —          —          —          —     
                                                   

Income (Loss) Before Income Taxes

    (953     (23,671         (16,837     (7,981     (85,876     18,051   

Income Tax (Expense) Benefit

    (317     10,423            6,928        1,891        6,885        (10,903
                                                   

Net Income (Loss)

  $ (1,270   $ (13,248       $ (9,909   $ (6,090   $ (78,991   $ 7,148   
                                                   

Net Loss Attributable to Common Stockholders

  $ (1,270   $ (13,248       $ (26,718   $ (25,591   $ (100,060   $ (15,676
                                                   
 

Cash Flow Data:

               

Cash Provided By Operating Activities

  $ 32,048      $ 16,476          $ 80,675      $ 36,479      $ 73,223      $ 86,595   

Net Cash Used in Investing Activities

    (54,249     (2,565         (650,114     (80,124     (36,140     (37,875

Net Cash (Used in) Provided by Financing Activities

    22,648        (13,305         571,415        47,461        (13,061     (29,042
 

Balance Sheet Data (at period end – unaudited at December 31, 2007):

               

Cash and Cash Equivalents

  $ 3,178      $ 3,784          $ 1,976      $ 5,792      $ 29,814      $ 49,492   

Working Capital(2)

    45,900        10,616            6,715        38,332        9,832        8,837   

Goodwill and Other Intangible Assets

    281,409        280,961            488,125        480,606        420,418        407,443   

Total Assets

    624,337        635,133            903,940        856,865        824,389        878,905   

Long-term Debt, Including Current Portion and indebtedness to related parties

    411,200        397,895            400,086        454,367        449,612        426,641   

Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

    36,335        20,017            215,947        190,120        122,874        125,891   
 

Other Financial Data:

               

Revenue After Raw Materials Costs(3)

  $ 377,479      $ 23,532          $ 386,876      $ 467,488      $ 358,346        466,126   

Adjusted EBITDA(4)

    90,978        624            91,758        103,178        83,764        119,920   

Adjusted EBITDA Margin(5)

    24.1     2.7         23.7     22.1     23.4     25.7

Capital Expenditures(6)

  $ 56,908      $ 2,738          $ 51,876      $ 62,852      $ 37,635      $ 39,816   

Growth Capital Expenditures(6)

    19,550        —              15,789        26,966        23,186        9,475   

Maintenance Capital Expenditures(6)

    37,358        2,738            36,087        35,886        15,792        31,158   

Free Cash Flow(7)

    53,620        (2,114         55,671        67,292        67,972        88,762   

 

(1) The compensation and other expenses associated with the business combination the Predecessor Company incurred during the period from January 1, 2007 to January 25, 2007 were specifically related to the Onex Acquisition and are not recurring. They consisted of $16.3 million recognized in connection with the changes to and the subsequent cancellation of the Predecessor Company’s stock option plan, $1.3 million in associated fringe benefit costs and $1.0 million of costs associated with the Onex Acquisition (primarily legal fees) that were not reimbursed in the Onex Acquisition and were therefore charged to the Predecessor Company’s operations.

 

(2) Working capital is calculated as current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt and revolving borrowings.

 

(3) Revenue After Raw Materials Costs represents Total Revenue minus Cost of Raw Materials Shipments. We believe Revenue After Raw Materials Costs is useful in measuring our operating performance because it excludes the fluctuations in the market prices of the raw materials we procure for and sell to our customers. We subtract the Cost of Raw Materials Shipments from Total Revenue because market prices of the raw materials we procure for and generally concurrently sell to our customers are offset on our statement of operations. By subtracting the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services and we are better able to evaluate our operating performance. Revenue After Raw Materials Costs is not a recognized financial measure under GAAP and may not be comparable to similarly titled measures used by other companies in our industry. Revenue After Raw Materials Costs should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

 

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The following table sets forth our calculation of Revenue After Raw Materials Costs:

 

    Predecessor Company           Successor Company  

(dollars in thousands)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

Revenue After Raw Materials Costs

               

Total Revenue

  $ 1,375,599      $ 95,161          $ 1,574,887      $ 2,982,913      $ 1,298,339      $ 2,030,630   

Cost of Raw Materials Shipments

    (998,120     (71,629         (1,188,011     (2,515,425     (939,993     (1,564,504
                                                   

Revenue After Raw Materials Costs

  $ 377,479      $ 23,532          $ 386,876      $ 467,488      $ 358,346      $ 466,126   
                                                   

 

(4) Adjusted EBITDA represents net income (loss) before income taxes, Interest Expense, Net, Depreciation and Amortization and certain other items, such as expenses associated with withdrawn public offerings, compensation provided as a result of business combinations, losses or gains in respect of debt extinguishment, goodwill impairment charges and dispositions of cumulative translation adjustments. We also use Adjusted EBITDA to benchmark the performance of our business against expected results, to analyze year-over-year trends, and to compare our operating performance to that of our competitors. We also use Adjusted EBITDA as a performance measure because it excludes the impact of tax provisions and Depreciation and Amortization, which are difficult to compare across periods due to the impact of accounting for business combinations and the impact of tax net operating losses on cash taxes paid. We believe the presentation of Adjusted EBITDA enhances our investors’ overall understanding of the financial performance of and prospects for our business. Adjusted EBITDA is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income, operating income (loss) or any other performance measures derived in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

The following table reconciles Net Income (Loss) to Adjusted EBITDA:

 

    Predecessor Company           Successor Company  

(dollars in thousands)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

Adjusted EBITDA

               

Net Income (Loss)

  $ (1,270   $ (13,428       $ (9,909   $ (6,090   $ (78,991   $ 7,148   

Income Tax (Benefit) Expense

    317        (10,243         (6,928     (1,891     (6,885     10,903   

Interest Expense, Net

    33,941        2,483            38,211        38,079        44,825        40,361   

Depreciation and Amortization

    55,256        3,794            70,384        73,080        69,760        61,508   
                                                   

EBITDA

  $ 88,244      $ (17,394       $ 91,758      $ 103,178      $ 28,709      $ 119,920   

Expenses Associated with Withdrawn Public Offerings

    2,734        —              —          —          —          —     

Compensation Provided as a Result of Business Combinations

    —          18,631            —          —          —          —     

Loss (Gain) on Debt Extinguishment

    —          —              —          —          (1,505     —     

Goodwill Impairment Charge

    —          —              —          —          55,000        —     

Disposition of Cumulative Translation Adjustment

    —          —              —          —          1,560        —     

Other Income

    —          (613         —          —          —          —     
                                                   

Adjusted EBITDA

  $ 90,978      $ 624          $ 91,758      $ 103,178      $ 83,764      $ 119,920   
                                                   
(5) Adjusted EBITDA Margin is calculated by dividing our Adjusted EBITDA by our Revenue After Raw Materials Costs. We believe our Adjusted EBITDA Margin is useful in measuring our profitability and our control of cash operating costs relative to Revenue After Raw Materials Costs. Adjusted EBITDA Margin is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA Margin should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

 

(6) We separate our Capital Expenditures into two categories: (1) Growth Capital Expenditures and (2) Maintenance Capital Expenditures. We believe that Growth Capital Expenditures and Maintenance Capital Expenditures are useful in measuring our operating performance. Growth Capital Expenditures relate to the establishment of our operations at new customer sites, the performance of additional services or significant productivity improvements at existing customer sites. We incur Maintenance Capital Expenditures as part of our ongoing operations, and Maintenance Capital Expenditures generally include the cost of normal replacement of capital equipment used at existing sites on existing contracts, additional capital expenditures made in connection with the extension of an existing contract and capital costs associated with acquiring previously leased equipment. Growth Capital Expenditures and Maintenance Capital Expenditures are not recognized financial measures under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Growth Capital Expenditures and Maintenance Capital Expenditures should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

 

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The following table sets forth our total Capital Expenditures, Growth Capital Expenditures and Maintenance Capital Expenditures:

 

    Predecessor Company          

Successor Company

 
                   

(dollars in thousands)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

Total Capital Expenditures

               

Growth Capital Expenditures

  $ 19,550      $ —            $ 15,789      $ 26,966      $ 23,186      $ 9,475   

Maintenance Capital Expenditures

    37,358        2,738            36,087        35,886        15,792        31,158   

Capital Leases

    —          —              —          —          (1,343     (322

Total Mill Services acquired assets

    —          —              —          —          —          (495
                                                   

Total Capital Expenditures

  $ 56,908      $ 2,738          $ 51,876      $ 62,852      $ 37,635      $ 39,816   
                                                   

 

(7) Free Cash Flow is calculated as our Adjusted EBITDA minus our Maintenance Capital Expenditures. We believe Free Cash Flow is useful in measuring our liquidity. Free Cash Flow is not a recognized financial measure under GAAP, and may not be comparable to similarly titled measures used by other companies in our industry. Free Cash Flow should not be considered in isolation from or as an alternative to any other performance measures determined in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Measures We Use to Evaluate Our Company.”

The following table sets forth our calculation of Free Cash Flow:

 

    Predecessor Company          

Successor Company

 
                   

(dollars in thousands)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

Free Cash Flow

               

Adjusted EBITDA

  $ 90,978      $ 624          $ 91,758      $ 103,178      $ 83,764      $ 119,920   

Maintenance Capital Expenditures

    (37,358     (2,738         (36,087     (35,886     (15,792     (31,158
                                                   

Free Cash Flow

  $ 53,620      $ (2,114       $ 55,671      $ 67,292      $ 67,972      $ 87,762   
                                                   

The following table reconciles Free Cash Flow to net cash provided by (used in) operating activities:

 

    Predecessor Company           Successor Company  

(dollars in thousands)

  Year
ended
December  31,
2006
    January 1,
2007 to
January 25,
2007
          January 26,
2007 to
December 31,
2007
    Year
ended
December  31,
2008
    Year
ended
December  31,
2009
    Year
ended
December  31,
2010
 
                                           

Free Cash Flow

  $ 53,620      $ (2,114       $ 55,671      $ 67,292      $ 67,972      $ 88,762   

Maintenance Capital Expenditures

    37,358        2,738            36,087        35,886        15,792        31,158   

Cash interest expense

    (33,585     (722         (26,750     (36,165     (35,383     (33,521

Cash income taxes

    1,291        —              (926     (2,501     (2,461     (3,266

Change in accounts receivable

    (15,045     (8,521         (18,070     39,202        (22,479     (42,652

Change in inventory

    (2,922     (2,770         (17,397     26,386        (13,229     (6,749

Change in accounts payable

    (3,204     22,880            45,203        (77,360     59,673        48,157   

Change in other current assets and liabilities

    2,809        3,264            7,577        (9,171     365        4,231   

Other operating cash flows

    (8,274     1,721            (720     (7,090     2,973        525   
                                                       

Net cash provided by operating activities

  $ 32,048      $ 16,476          $ 80,675      $ 36,479      $ 73,223      $ 86,595   
                                                       

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in conjunction with our consolidated financial statements and the related notes included in this prospectus. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See “Risk Factors” and “Forward-Looking Statements.”

Introduction

The following discussion is provided to supplement the audited consolidated financial statements and the related notes included elsewhere in this prospectus to help provide an understanding of our financial condition, changes in financial condition and results of our operations, and is organized as follows:

Company Overview. This section provides a general description of our business in order to better understand our financial condition and results of operations and to anticipate future trends and risks in our business.

Certain Line Items Presented. This section provides an explanation of certain GAAP line items that are presented in our audited consolidated financial statements included elsewhere in this prospectus. These line items are discussed in detail under the heading “—Results of Operations” below for the periods presented.

Key Measures We Use to Evaluate Our Company. This section provides an overview of certain non-GAAP measures that we believe are critical to understand in order to evaluate and assess our business. These are the measures that management utilizes most to assess our results of operations, anticipate future trends and risks and determine compensation levels, including under our management bonus plan.

Impact of the Onex Acquisition on Comparability of Results. This section provides an overview of the Onex Acquisition and its impact on how we present our results of operations on a historical basis for fiscal periods beginning either prior to or after the consummation of the Onex Acquisition on January 25, 2007.

Application of Critical Accounting Policies. This section discusses the accounting policies and estimates that we consider important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application.

Results of Operations. This section provides a discussion of our results of operations for: (1) fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009; and (2) fiscal year ended December 31, 2009 compared to fiscal year ended December 31, 2008.

Quarterly Comparison. This section presents quarterly revenue and income data for each of the quarters from March 31, 2008 through December 31, 2010.

Liquidity and Capital Resources. This section provides an analysis of our cash flows for: (1) fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009; and (2) fiscal year ended December 31, 2009 compared to fiscal year ended December 31, 2008. This section also includes a discussion of our liquidity, Capital Expenditures and indebtedness.

Pension and Post-Employment Benefit Obligations. This section provides an analysis of our obligations under our benefit plans as of December 31, 2010.

 

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Commitments and Contractual Obligations. This section provides an analysis of our commitments and contractual obligations as of December 31, 2010 and December 31, 2009.

Quantitative and Qualitative Disclosures about Market Risk. This section discusses our exposure to potential losses arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices.

Company Overview

We are the largest provider of outsourced industrial services to steel mills in North America as measured by revenue and have a substantial and growing international presence. We offer the most comprehensive suite of outsourced industrial services to the steel industry. Our employees and equipment are embedded at customer sites and are integral throughout the steel production process other than steel making itself. Our services are critical to our customers’ 24-hour-a-day operations, enabling them to generate substantial operational efficiencies and cost savings while focusing on their core business of steel making. We operate at 73 customer sites in nine countries across North America, Europe and Latin America and our global raw materials procurement network spans five continents. Over the past 80 years we have established long-standing customer relationships and have served our top 10 customers, on average, for over 28 years. Our diversified customer base includes 12 of the top 15 largest global steel producers, including United States Steel, ArcelorMittal, Gerdau, Nucor, Baosteel, POSCO and Tata Steel.

We provide a broad range of services through two reporting segments: our Mill Services Group and our Raw Material and Optimization Group:

 

   

Mill Services Group. The services provided under this segment are performed at our customer sites under long-term contracts. These contracts are typically structured on a fee-per-ton basis tied to production volumes at our customer sites and are not based on the underlying price of steel. In addition, our contracts typically include tiered pricing structures, with unit prices that increase as volumes decline, and/or minimum monthly fees, each of which stabilizes our revenue in the event of volume fluctuations. The services provided to our customers under this segment include: (1) scrap management and preparation; (2) semi-finished and finished material handling; (3) metal recovery and slag handling, processing and sales; and (4) surface conditioning. The revenues from these services appear in the line item “Service Revenue” on our statement of operations, and the costs associated therewith appear in “Site Operating Costs” on our statement of operations. Substantially all of our Capital Expenditures, whether Growth Capital Expenditures or Maintenance Capital Expenditures, are incurred in connection with the services provided by this segment. This segment also includes the results of operations at our location where we buy, process and sell scrap for our own account, which revenues appear in the line item “Revenue from Sale of Materials” on our statement of operations and the costs associated therewith appear in “Cost of Raw Materials Shipments” on our statement of operations. This location represented 5.8% of the Mill Services Group’s Adjusted EBITDA for the year ended December 31, 2010. The Total Revenue and Cost of Raw Materials Shipments from this location will fluctuate based upon the underlying price of scrap.

 

   

Raw Material and Optimization Group. The services provided under this segment include: (1) raw materials procurement and logistics; and (2) proprietary software-based raw materials cost optimization. Revenues for the raw materials procurement and logistics services we provide are primarily generated pursuant to two alternative transaction models: (1) a contractually determined, volume-based fee for arranging delivery of raw materials shipments to a customer directly from a vendor with no price or inventory risk; or (2) a generally concurrent arrangement to purchase for our own account and sell raw materials at specified prices, typically locking in a margin with minimal price or inventory risk. In addition, we occasionally take measured market risk in connection with our raw materials procurement services by either purchasing raw materials at a fixed price without an immediate corresponding sale order or agreeing to sell raw materials at a

 

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fixed price before having procured such materials. The revenues from our raw materials procurement and logistics services appear in the line item “Revenue from Sale of Materials” and the related costs appear in the line item “Cost of Raw Materials Shipments” on our statement of operations. Our earnings are primarily driven by the steel production volumes of our customers rather than by the prices of steel or raw materials. We subtract the Cost of Raw Materials Shipments from Revenue from Sale of Materials, because market prices of the raw materials we procure for and generally concurrently sell to our customers are offset on our statement of operations. By subtracting the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services, and we are better able to evaluate our performance in terms of the volume of raw materials we procure for our customers and the margin we generate. We refer to this measure as “Revenue After Raw Materials Costs,” which is a non-GAAP financial measure that we believe is critical in order to assess and evaluate our business. For additional information on Revenue After Raw Materials Costs, see “—Key Measures We Use to Evaluate Our Company—Revenue After Raw Materials Costs” below. Tables reconciling Total Revenue to Revenue After Raw Materials Costs are included in “Prospectus Summary—Summary Consolidated Financial Data.”

The vast majority of our Revenue After Raw Materials Costs and profitability is tied to our customers’ production volumes. Factors that impact a steel mill’s production levels include general economic conditions, North American and global demand for steel, competition and competitive pricing, and the relative strength of the U.S. dollar.

During the first nine months of 2008, steel production levels of our customers were strong and the average U.S. steel capacity utilization rate was 89%. However, beginning in the fall of 2008, the global economy entered into a severe recession, which dramatically impacted our customers and their production volumes, which in turn adversely affected our results of operations in late 2008 and throughout 2009. Specifically, United States gross domestic product (“GDP”) declined by annualized quarter-to-quarter rates of 5.4% and 6.4% in the fourth quarter of 2008 and first quarter of 2009, respectively, and global GDP declined by 5.3% and 6.6% in those same time periods. The leading end markets for steel were particularly hard hit, resulting in a dramatic decline in steel production for our customers industry-wide. North American steel production reached a trough in March 2009 and then began to rise gradually through the balance of the year, although production remains significantly below long-term average levels. Full-year North American crude steel production in 2009 was 38% below that of 2008. This reduced production of steel drove a reduction in our Revenue After Raw Materials Costs, the impact of which was partially offset by the effect of contractual fixed fees and tiered pricing. Our contracts typically include tiered pricing structures, with unit prices that increase as volumes decline, and/or minimum monthly fees, each of which stabilizes our revenue in the event of volume fluctuations. Further highlighting the strengths of our business model, when scrap prices for Number One Heavy Melt Scrap, an indicative grade of ferrous scrap, dropped precipitously from a peak of $523 per ton in July 2008 to a low of $99 per ton in November 2008, we incurred only a $1.6 million charge for inventory value reductions.

We responded quickly to the changing and challenging business conditions in 2009 by: (1) reducing our cash operating costs, which are approximately 80% variable; (2) realizing significant overhead cost reductions in our Site Operating Costs and Selling, General and Administrative Expenses that we believe will be sustainable; and (3) optimizing our asset utilization. Our cost reductions were generated primarily from: (1) an approximately 30% reduction of employees worldwide; (2) salary freezes and reductions; (3) the reorganization of certain employee benefit programs; (4) the restructuring of incentive compensation programs; (5) the restructuring of insurance programs; and (6) reductions of travel and entertainment expenses, professional fees, marketing costs and discretionary spending.

Our Maintenance Capital Expenditures are variable because they are correlated to equipment utilization, which in turn is based on our customers’ production volumes. During 2009, as our customers’ production declined, our equipment required less repair and replacement. Additionally, we optimized our asset utilization by relocating certain pieces of equipment to customer sites with higher production volumes.

 

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Collectively, these efforts produced expanded Adjusted EBITDA Margins and strong Free Cash Flow during 2009. Throughout the economic downturn, we continued to enter into new long-term contracts and invest growth capital, thereby positioning us to generate strong earnings and growth as steel production volumes continued to recover in 2010. The average U.S. steel capacity utilization rate grew approximately 37%, from 51% in 2009 to 70% in 2010, and, accordingly, our Revenue After Raw Materials Costs grew by approximately 30%. Over the same period, our Adjusted EBITDA grew 43% to a record $119.9 million due to a more effective leveraging of our cost base and previously-invested growth capital. We believe that our demonstrated operating efficiency coupled with our strong business model positions us to continue to benefit from increased steel production volumes as the end markets continue to recover.

Over the last five years, we have expanded from primarily generating our Revenue After Raw Materials Costs and Adjusted EBITDA from North America, to generating approximately 19% and 16% of our 2010 Revenue After Raw Materials Costs and Adjusted EBITDA, respectively, internationally. We believe we have substantial international growth opportunities which will be driven by expansion of our market share and continued growth in outsourcing in developing markets, such as Latin America, Eastern Europe, Asia and the Middle East.

Certain Line Items Presented

Revenue from Sale of Materials. Revenue from Sale of Materials is generated by each of our two operating segments as follows:

 

   

Our Mill Services Group generates some Revenue from Sale of Materials by buying, processing, and selling scrap for our own account.

 

   

Our Raw Material and Optimization Group primarily generates Revenue from Sale of Materials through raw materials procurement activities using two alternative transaction models. In the first type we take no title to the materials being procured and we record only our commission as revenue; in the second type, we take title to the material and sell it to a buyer, typically in a transaction where a buyer and seller are matched, and we record Revenue from Sale of Materials for the full value of the material based on the amount we invoice to our customer.

For the year ended December 31, 2010, approximately 9% of our Revenue from Sale of Materials was generated by our Mill Services Group, and approximately 91% of our Revenue from Sale of Materials was generated by the raw materials procurement activities of our Raw Material and Optimization Group.

Service Revenue. Service Revenue is generated from our two operating segments as follows:

 

   

Our Mill Services Group generates Service Revenue from the services we provide to customers at their sites. This Service Revenue is generated from a combination of: (1) contractually committed base monthly fees; (2) fees for services based on customer production volumes; and (3) revenue from the sale of steel manufacturing co-products sold for our own account, less a royalty fee paid to the host mill.

 

   

Our Raw Material and Optimization Group generates Service Revenue by providing our proprietary software-based raw materials cost optimization service, which calculates the lowest cost blend of raw materials necessary to make a customer’s specified chemistry of steel. We typically charge an optimization service fee for each ton of scrap used in steel manufacturing.

For the year ended December 31, 2010, approximately 98% of our Service Revenue was generated by our Mill Services Group, and approximately 2% of our Service Revenue was generated by our Raw Material and Optimization Group.

 

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Cost of Raw Materials Shipments. The activities that generate Revenue from Sale of Materials also incur Cost of Raw Materials Shipments, and are described as follows:

 

   

Our Mill Services Group generates Revenue from Sale of Materials by buying, processing and selling scrap for our own account. We record the cost of the purchase of raw materials as Cost of Raw Materials Shipments.

 

   

Our Raw Material and Optimization Group generates Revenue from Sale of Materials through our raw materials procurement activities. When we arrange to purchase and sell scrap and other raw materials, the cost of such materials purchased and other direct costs including transportation are recorded as Cost of Raw Materials Shipments.

Site Operating Costs. Our Site Operating Costs are highly variable and largely correlated to the volume of steel produced at our customer sites. Site Operating Costs are predominantly incurred by our Mill Services Group and consist of employees’ wages, employee benefits, costs of operating supplies such as fuels and lubricants, repair and maintenance costs and equipment leasing costs.

Selling, General and Administrative Expenses. Our Selling, General and Administrative Expenses consist of labor and related costs of selling and administration, professional fees, insurance costs, management fees, bad debt costs, bank fees and corporate expenses and bonuses.

Depreciation and Amortization. Our consolidated Depreciation consists of Depreciation expenses related to property, plant and equipment. Our consolidated Amortization consists of Amortization expenses related to finite life intangibles such as environmental permits, customer related intangibles, patents and unpatented technology, in each case recognized on a straight-line basis over the estimated useful life of the asset.

Income (Loss) from Operations. Income (Loss) from Operations consists of Total Revenue less Total Costs and Expenses but does not include Goodwill Impairment, Interest Expense, Net and certain other items that we believe are not indicative of future results.

Key Measures We Use to Evaluate Our Company

In addition to the GAAP line items described above, we also use the following additional financial measures to evaluate and assess our business:

Revenue After Raw Materials Costs. We measure our sales volume on the basis of Revenue After Raw Materials Costs, which we define as Total Revenue minus Cost of Raw Materials Shipments. Revenue After Raw Materials Costs is not a recognized financial measure under GAAP, but we believe it is useful in measuring our operating performance because it excludes the fluctuations in the market prices of the raw materials we procure for and sell to our customers. We subtract the Cost of Raw Materials Shipments from Total Revenue because market prices of the raw materials we procure for and generally concurrently sell to our customers are offset on our statement of operations. Further, in our raw materials procurement business, we generally engage in two alternative types of transactions that require different accounting treatments for Total Revenue. In the first type, we take no title to the materials being procured and we record only our commission as revenue; in the second type, we take title to the materials and sell it to a buyer, typically in a transaction where a buyer and seller are matched. By subtracting the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services, and we are better able to evaluate our operating performance in terms of the volume of raw materials we procure for our customers and the margin we generate.

Adjusted EBITDA. Adjusted EBITDA is not a recognized financial measure under GAAP, but we believe it is useful in measuring our operating performance. Adjusted EBITDA is used internally to determine our incentive compensation levels, including under our management bonus plan, and it is required, with some

 

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additional adjustments, in certain covenant compliance calculations under our senior secured credit facilities. We also use Adjusted EBITDA to benchmark the performance of our business against expected results, to analyze year-over-year trends and to compare our operating performance to that of our competitors. We also use Adjusted EBITDA as a performance measure because it excludes the impact of tax provisions and Depreciation and Amortization, which are difficult to compare across periods due to the impact of accounting for business combinations and the impact of tax net operating losses on cash taxes paid. In addition, we use Adjusted EBITDA as a performance measure of our operating segments in accordance with ASC Topic 280, Disclosures About Segments of an Enterprise and Related Information. We believe that the presentation of Adjusted EBITDA enhances our investors’ overall understanding of the financial performance of and prospects for our business.

Adjusted EBITDA Margin. Adjusted EBITDA Margin is not a recognized financial measure under GAAP, but we believe it is useful in measuring our operating performance. We calculate Adjusted EBITDA Margin by dividing our Adjusted EBITDA by our Revenue After Raw Materials Costs. We use Adjusted EBITDA Margin to measure our profitability and our control of cash operating costs relative to Revenue After Raw Materials Costs.

Capital Expenditures. We separate our Capital Expenditures into two categories: (1) Growth Capital Expenditures and (2) Maintenance Capital Expenditures. We separate our Capital Expenditures between these two categories because it helps us to differentiate between the discretionary cash we invest in our growth and the cash required to maintain our existing business. Growth Capital Expenditures and Maintenance Capital Expenditures are not recognized financial measures under GAAP, but we believe they are useful in measuring our operating performance. We also use these measures as a component in determining our performance-based compensation.

Growth Capital Expenditures relate to the establishment of our operations at new customer sites, the performance of additional services or significant productivity improvements at existing customer sites. We incur Growth Capital Expenditures when we win a new contract. Our Mill Services Group contracts generally require that we acquire the capital equipment necessary to provide the service in advance of receiving revenue from the contract.

We incur Maintenance Capital Expenditures as part of our ongoing operations. Maintenance Capital Expenditures generally include: (1) the cost of normal replacement of capital equipment used at existing customer sites on existing contracts; (2) any additional capital expenditures made in connection with the extension of an existing contract; and (3) any capital costs associated with acquiring previously leased equipment. We generally replace our equipment on a schedule that is based on the operating hours of that equipment. We expect Maintenance Capital Expenditures to be greater in periods where our customers’ production volumes are high, requiring us to operate more hours. Conversely, when our customers are producing less, we would expect fewer operating hours and reduced Maintenance Capital Expenditures.

Free Cash Flow. Free Cash Flow is not a recognized financial measure under GAAP. We calculate Free Cash Flow as our Adjusted EBITDA minus our Maintenance Capital Expenditures, and we believe it is an important measure in analyzing our liquidity. In combination with our available liquidity, we use our Free Cash Flow to assist us in determining our capacity to: (1) invest in Growth Capital Expenditures; (2) finance changes in our working capital, particularly in our raw materials procurement activities; and (3) voluntarily repay portions of our debt obligations. In addition, we use this measure to help determine how efficiently we are managing our assets, and we also use it as a component in determining our performance-based compensation.

 

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Impact of the Onex Acquisition on Comparability of Results

On January 25, 2007, Onex and members of management completed the Onex Acquisition of Tube City IMS Corporation, which we refer to as the Predecessor Company. The Onex Acquisition impacts the comparability of our results as follows:

Predecessor and Successor Periods. TMS International Corp., which following the Onex Acquisition is referred to as the Successor Company, was formed for the purpose of acquiring the Predecessor Company. The operations of the Successor Company prior to the Onex Acquisition were insignificant relative to those of the Predecessor Company during the same period. Accordingly, we show the results of the Predecessor Company on and prior to the completion of the Onex Acquisition on January 25, 2007 and the results of the Successor Company and its subsidiaries after the Onex Acquisition.

Accounting for Business Combinations. We accounted for the Onex Acquisition in accordance with ASC 805 using the purchase method of accounting. Acquired tangible assets, identifiable intangible assets and assumed liabilities were recorded on our books at their estimated fair value. Because the Onex Acquisition consideration exceeded the fair value of the net identifiable tangible and intangible assets, we recorded goodwill in the transaction. As a result of the Onex Acquisition, we:

 

   

increased the carrying value of property plant and equipment by $29.4 million;

 

   

recorded $204.7 million of identifiable intangible assets; and

 

   

recorded $289.4 million of goodwill.

These additional assets resulted in non-cash expenses and charges in the subsequent periods, including:

 

   

additional depreciation expense of $2.6 million, $4.4 million, $8.2 million, and $12.4 million during 2010, 2009, 2008 and for the period from January 26, 2007 to December 31, 2007, respectively;

 

   

amortization expense of $11.7, $11.7 million, $11.8 million and $11.0 million during 2010, 2009, 2008 and for the period from January 26, 2007 to December 31, 2007, respectively; and

 

   

a $55.0 million charge for the impairment of goodwill in 2009. See “—Application of Critical Accounting Policies—Goodwill and Other Intangible Assets.”

Charges Related Directly to the Onex Acquisition. In connection with the Onex Acquisition, during January 2007 the Predecessor Company recorded compensation and other associated costs of $18.6 million, consisting of $16.3 million related to the termination of the Predecessor Company’s stock option plan, an additional $1.3 million in fringe benefits related to the option termination and $1.0 million of fees and expenses associated with the transaction which were not reimbursed.

Application of Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments. The most critical accounting policies and estimates are described below.

Revenue Recognition. Revenue includes two categories: (1) Revenue from Sale of Materials and (2) Service Revenue.

 

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Revenue from Sale of Materials is mainly generated by our raw materials procurement business, although it also includes revenue from our Mill Services Group location where we buy, process and sell scrap for our own account. We recognize Revenue from Sale of Materials when title and risk of loss pass to the customer, which is determined by the terms of the sale.

We generate Service Revenue from scrap management, scrap preparation, raw materials optimization, metal recovery and sales, material handling or product handling, slag processing and metal recovery services, surface conditioning and other services. We recognize revenue when we perform the service or when title and risk of loss pass to the buyer.

In our raw materials procurement business, we generally engage in two types of transactions that require different accounting treatment. For certain transactions, we facilitate the purchase or sale of raw materials between a buyer and seller for a volume-based commission. The seller assumes the credit risk after delivery. At no point in the transaction do we take title to or assume the risk of loss of the material. We record only the commission as revenue on these transactions.

For other raw materials procurement transactions, we purchase the material from a seller and sell it to a buyer. In these transactions, we take title to the material and assume the risk of loss for some period of time, usually during transit between the seller and the buyer for F.O.B. destination sales. While we take steps to mitigate credit loss exposure, we also assume credit risk for the full amount billed to the customer. In these transactions, we record Revenue from Sale of Materials for the full value of the material based on the amount we invoice to our customer.

Trade Receivables. We perform ongoing credit evaluations of our customers and generally do not require our customers to post collateral, although we typically require letters of credit or other credit assurances in our raw materials procurement business for international transactions. Account balances outstanding longer than the payment terms are considered past due and provisions are made for estimated uncollectible receivables. Our estimates are based on historical collection experience, a review of the current status of receivables, our judgment of the credit quality of our customer and the condition of the general economy and the industry. Decisions to charge off receivables are based on management’s judgment after consideration of facts and circumstances surrounding potential uncollectible accounts.

Property, Plant and Equipment. Property, plant and equipment are recorded at cost less accumulated depreciation. Costs in connection with business combinations are based on fair market value at the time of acquisition. Major components of certain high value equipment are recorded as separate assets with depreciable lives determined independently from the remainder of the asset. Expenditures that extend the useful lives of existing plant and equipment are capitalized, while expenditures for repairs and maintenance that do not extend the useful lives or improve productivity of the related assets are charged to expenses as incurred. The cost of property, plant and equipment retired or otherwise disposed of and the related accumulated depreciation are removed from our accounts, and any resulting gain or loss is reflected in current operations.

Depreciation of property, plant and equipment is computed principally on the straight-line method over the estimated useful lives of assets.

Goodwill and Other Intangible Assets. Goodwill and other indefinite life intangible assets not subject to amortization are recorded at the lower of cost or implied fair value. Finite life intangible assets subject to amortization are recorded at cost less accumulated amortization provided on a straight-line basis over the intangible assets’ estimated useful lives. Goodwill and indefinite life intangibles are evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. ASC Topic 350, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment evaluation used to identify potential impairment compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired, and the second step of the impairment evaluation is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step of the evaluation must be performed to measure the goodwill impairment loss, if any. The second step of the evaluation compares the

 

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implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill so calculated, an impairment loss is recognized in an amount equal to the excess.

During 2010, we did not record any impairment charge related to goodwill. We tested for impairment on October 1, 2010, the annual test date. There were no events that triggered any additional impairment tests during 2010. In testing for impairment, we estimate the fair values of our reporting units under the income and market approach.

The income approach was based upon projected future cash flows discounted to present value using factors that consider the timing and risk associated with the future cash flows. Fair value for each reporting unit was estimated using future cash flow projections based on management’s long range estimates of market conditions over a multiple year horizon. A four percent perpetual growth rate was used to arrive at the estimated future terminal value. A discount rate of 11% was used for the Mill Services Group reporting unit and a discount rate of 13% was used for the Raw Material and Optimization Group reporting unit which were based upon the cost of capital of other comparable companies adjusted for company specific risks.

The market approach was based upon an analysis of valuation metrics for companies comparable to our reporting units. The fair value of the business enterprise value for both reporting units was estimated using a range of EBITDA multiples of market participants. We determined the fair value estimate during its testing using the income approach and used the market approach to corroborate the value as determined by the income approach.

In May 2009, the continuing economic downturn and a change in our forecast related to certain customers and sites triggered a goodwill impairment evaluation in advance of our annual impairment evaluation. In performing the first step of the evaluation, we determined that the estimated fair value of our Raw Material and Optimization Group exceeded its carrying value and that the second step of the evaluation was not necessary for that segment; however, we determined that the estimated fair value of the Mill Services Group was less than its carrying amount and proceeded to the second step of the evaluation for that segment. In the second step of the impairment evaluation, we determined that the carrying amount of goodwill allocated to our Mill Services Group exceeded its estimated implied fair value of goodwill and, accordingly, recorded a $55.0 million impairment loss.

In the May 2009 impairment analysis, the income approach was based upon projected future cash flows discounted to present value using factors that consider the timing and risk associated with the future cash flows. Fair value for each reporting unit was estimated using future cash flow projections based on management’s long range estimates of market conditions over a multiple year horizon. A 3% perpetual growth rate was used to arrive at the estimated future terminal value. An after-tax discount rate of 14.6% was used to discount the projected cash flows for both reporting units which was based upon the cost of capital of other market participants adjusted for company specific risks. The market approach, which was based upon an analysis of valuation metrics for comparable companies, was used in the May 2009 impairment test to corroborate the value as determined by the income approach.

As of December 31, 2010, the Mill Services Group and the Raw Material and Optimization Group had $162.3 million and $79.9 million of goodwill, respectively. The 2010 annual goodwill impairment test, as of October 1, 2010, indicated that the estimated fair value of our Mill Services Group and our Raw Material and Optimization Group exceeded their carrying values by approximately 30% and 36%, respectively. The estimates of fair value of a reporting unit under the income approach are based on a discounted cash flow analysis which requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates. If business conditions change or other factors have an adverse effect on our estimates of discounted future cash flows, assumed growth rates or discount rates, future tests of goodwill impairment may result in additional impairment charges.

 

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Impairment of Long-Lived Assets. Long-lived assets, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Impairment is assessed when the undiscounted expected cash flow derived from an asset is less than its recorded amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment evaluation, the undiscounted cash flow used to assess impairments and the fair value of an impaired asset.

Foreign Currency Translation. The financial statements of our foreign subsidiaries are generally measured using the local currency as the functional currency. Assets and liabilities of our foreign subsidiaries are translated at the exchange rate as of the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment account, a separate component of other comprehensive income (loss). Income and expense items are translated at average monthly exchange rates. During 2009, we substantially liquidated the assets of one of our foreign subsidiaries. ASC 830-30-40-1 requires that upon substantial liquidation, amounts that had previously been charged to the cumulative translation adjustment be reported in current earnings. Accordingly, we recorded a $1.6 million charge in the third quarter of 2009.

Health Insurance. We provide health insurance to a portion of our employees through premium-based indemnity plans or nationalized health care plans that may require employer contributions. We provide health insurance to the rest of our employees under a self-insurance plan that uses a third-party administrator to process and administer claims. We have stop-loss coverage through an insurer, in excess of a stated self-insured limit per employee. We maintain an accrual for unpaid claims and claims incurred but not reported. In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act were signed into law. We are currently evaluating the impact of this comprehensive legislation on our self-insured health plans and our business, financial condition and results of operations.

Workers’ Compensation. We self-insure our workers’ compensation insurance under a large deductible program. Under this program, the maximum exposure per claim is $1.0 million and stop-loss coverage is maintained for amounts above this limit. The aggregate maximum exposure is limited to a percentage of payroll for each open policy. We accrue for this expense in amounts that include estimates for incurred but not reported claims, as well as estimates for the ultimate cost of all known claims.

Share-Based Compensation. We adopted our Restricted Stock Plan in 2007. Under the plan, 25% of the shares granted vested immediately and the remainder vest in five annual equal installments, on the anniversary of the grant date, so long as the recipient remains an employee. ASC Topic 780 requires that share based payments be accounted for at their fair value on the date of grant. We immediately recognized $0.1 million in expense for the shares that vested on the grant date and are recognizing the remaining expense evenly over the five years the remaining shares vest.

 

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Results of Operations

Year Ended December 31, 2010 compared to Year Ended December 31, 2009

The following table sets forth each of the line items in our statement of operations for each of the periods indicated as well as the variances between the periods in terms of dollar amounts and percentage. The table also provides a reconciliation of Total Revenue to Revenue After Raw Materials Costs for each of the periods presented.

 

     Year ended December 31,     Variances  
(dollars in thousands)    2009     2010     $     %  

Statement of Operations Data:

        

Revenue:

        

Revenue from Sale of Materials

   $ 986,304      $ 1,629,119      $ 642,815        65.2

Service Revenue

     312,035        401,511        89,476        28.7
                          

Total Revenue

     1,298,339        2,030,630        732,291        56.4

Costs and expenses:

        

Cost of Raw Materials Shipments

     939,993        1,564,504        624,511        66.4

Site Operating Costs

     233,120        293,003        59,883        25.7

Selling, General and Administrative Expenses

     44,638        53,139        8,501        19.0

Provision for (Recovery of) Bad Debts

     (5,419     64        5,483        —     

Provision for Transition Agreement

     2,243        —          (2,243     —     

Depreciation and Amortization

     69,760        61,508        (8,252     -11.8
                          

Total costs and expenses

     1,284,335        1,972,218        687,883        53.6
                          

Income from Operations

     14,004        58,412        44,408     

Goodwill Impairment

     (55,000     —          55,000        —     

Gain on Early Extinguishment of Debt

     1,505        —          (1,505     —     

Disposition of Cumulative Translation Adjustment

     (1,560     —          1,560        —     

Interest Expense, Net

     (44,825     (40,361     4,465        -10.0
                          

Income (Loss) Before Income Taxes

     (85,876     18,051        103,927        —     

Income Tax (Expense) Benefit

     6,885        (10,903     (17,788     —     
                          

Net Income (Loss)

   $ (78,991   $ 7,148      $ 86,139        —     
                          

Other Financial Data:

        

Revenue After Raw Materials Costs:

        

Consolidated:

        

Total Revenue

   $ 1,298,339      $ 2,030,630      $ 732,291     

Cost of Raw Materials Shipments

     (939,993     (1,564,504     (624,511  
                          

Revenue After Raw Materials Costs

   $ 358,346      $ 466,126      $ 107,780        30.1
                          

Mill Services Group:

        

Total Revenue

   $ 377,825      $ 536,315      $ 158,490     

Cost of Raw Materials Shipments

     (59,160     (126,429     (67,269  
                          

Revenue After Raw Materials Costs

   $ 318,665      $ 409,886      $ 91,221        28.6
                          

Raw Materials and Optimization Group:

        

Total Revenue

   $ 920,239      $ 1,494,257      $ 574,018     

Cost of Raw Materials Shipments

     (880,733     (1,438,108     (557,375  
                          

Revenue After Raw Materials Costs

   $ 39,506      $ 56,149      $ 16,643        42.1
                          

Administrative:

        

Total Revenue

   $ 275      $ 58      $ (217  

Cost of Raw Materials Shipments

     (100     33        133     
                          

Revenue After Raw Materials Costs

   $ 175      $ 91      $ (84  
                          

Adjusted EBITDA:

        

Net Income (Loss)

   $ (78,991   $ 7,148      $ 86,139     

Income Tax Expense (Benefit)

     (6,885     10,903        17,788     

Interest Expense, Net

     44,825        40,361        (4,465  

Depreciation and Amortization

     69,760        61,508        (8,253  

Goodwill Impairment

     55,000        —          (55,000  

Gain on Early Extinguishment of Debt

     (1,505     —          1,505     

Disposition of Cumulative Translation Adjustment

     1,560        —          (1,560  
                          

Adjusted EBITDA

   $ 83,764      $ 119,920      $ 36,156        43.2
                          

Adjusted EBITDA by Operating Segment:

        

Mill Services Group

   $ 79,279      $ 111,354      $ 32,075        40.5

Raw Materials and Optimization Group

     31,655        41,994        10,339        32.7

Administrative Expenses

     (27,170     (33,428     (6,258     23.0
                          
   $ 83,764      $ 119,920      $ 36,156        43.2
                          

Adjusted EBITDA Margin

     23.4     25.7     2.3  

 

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Revenue from Sale of Materials. Revenue from Sale of Materials was $1,629.1 million for the year ended December 31, 2010 compared to $986.3 million for the year ended December 31, 2009. Revenue from Sale of Materials is primarily generated from raw materials procurement activities, which produced $1,487.1 million or approximately 91% of the Revenue from Sale of Materials for the year ended December 31, 2010, and $915.6 million or approximately 93% for the year ended December 31, 2009. The remaining Revenue from Sale of Materials of $142.1 million for the year ended December, 2010 and $71.2 million for the year ended December 31, 2009 was generated by our Mill Services Group locations where we buy, process and sell raw materials for our own account.

Revenue from Sale of Materials increased 65.2%, as the market price and volume of raw materials we procured for our customers increased in response to the continued recovery of the steel industry from depressed production levels experienced in early 2009. In the year ended December 31, 2010, we procured 9.8 million tons of raw materials for our customers compared to 6.9 million tons during year ended December 31, 2009. The same increases in market price and volume that contributed to higher Revenue from Sale of Materials also resulted in a 66.4% increase in the costs to procure the materials. The percentage increase in the Cost of Raw Materials Shipments was slightly greater than the percentage increase in the Revenue from the Sale of Materials due to lower per ton margins on the incremental volume we procured for our customers.

Service Revenue. Service Revenue was $401.5 million for the year ended December 31, 2010, compared to $312.0 million for the year ended December 31, 2009. Service Revenue is primarily generated by our Mill Services Group, which produced $394.3 million and $306.4 million for the years ended December 31, 2010 and 2009, respectively, with the remainder primarily generated by optimization services from our Raw Material and Optimization Group.

Our Service Revenue is largely correlated with of the volume of steel our customers produce. The volume of steel produced by our customers increased approximately 38% for the year ended December 31, 2010 compared to the year ended December 31, 2009. Our Service Revenue increased 28.7% in the same period. The percentage increase in Service Revenue was less than the percentage increase in our customers’ production volumes primarily due to the impact of contractual fixed fees and tiered pricing structures.

Cost of Raw Materials Shipments. The Cost of Raw Materials Shipments increased 66.4% due to an increase in the market price and volume of raw materials we procured for our customers. The average composite price of Number One Heavy Melt Scrap, an indicative grade of ferrous scrap, was $333 per ton during the year ended December 31, 2010, compared to $209 per ton for the year ended December 31, 2009.

Revenue After Raw Materials Costs. The Revenue After Raw Material Costs for our Mill Services Group increased $91.2 million or 28.6% for the year ended December 31, 2010 compared to the year ended December 31, 2009. New sites and new services generated $7.4 million of additional Revenue After Raw Materials Costs for the Mill Services Group, but the overall increase resulted primarily from increased steel production by our customers.

The Revenue After Raw Materials Costs for our Raw Material and Optimization Group increased $16.6 million or 42.1% to $56.1 million. The volume of raw materials we procured for our customers increased 42% from 6.9 million tons in 2009 to 9.8 million tons in 2010. Our average margin on our procurement activities declined slightly as some of the incremental volume we procured carried lower per ton margins.

Site Operating Costs. Site Operating Costs are primarily the costs incurred by our Mill Services Group in providing services to our customers. During the year ended December 31, 2010, the volume of steel produced by our customers increased and, accordingly, we generated 28.7% more Service Revenue than we had in the year ended December 31, 2009. Site Operating Costs, which are largely variable, increased 25.7%, as we incurred the employee, repair and maintenance, fuel and operating supplies costs necessary to respond to customers’ increased production volumes.

 

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Selling, General and Administrative Expenses. Selling, General and Administrative Expenses for the year ended December 31, 2010 were $53.1 million, compared to $44.6 million for the year ended December 31, 2009, an increase of $8.5 million or 19.0%. Improved operating performance during 2010 led to a $5.6 million increase in accrued incentive-based compensation expense. Additionally, in response to improving business conditions, we added to our administrative and raw material procurement staff, resulting in $2.2 million of additional employee costs. Professional fees, including legal costs, also increased $1.3 million as we incurred costs to help support international expansion as well as certain contract dispute arbitration costs.

Provision for Transition Agreement. Our former chief executive officer, Mr. Coslov, retired from that position in 2009, and is entitled to receive transition payments for two years, monthly compensation for his role as Non-Executive Chairman thereafter, as well as continuing health care benefits. A $2.2 million charge was recorded in 2009 related to the transition payments to Mr. Coslov.

Provision for (Recovery of) Bad Debts. For the year ended December 31, 2010, we recorded a provision for bad debts that was not material. For the year ended December 31, 2009, we recorded a net recovery of bad debts of $5.4 million. That amount was mainly driven by a single large international sale of raw materials that shipped in the third quarter of 2008. Due to unprecedented changes in the industry that were occurring at that time, our customer was unable to make payments as scheduled, and we negotiated a reduction in the total payment and an extension of the time frame over which the customer would pay. In 2008, we fully reserved $6.8 million of payments we negotiated to receive from our customer in 2009, as we were uncertain as to the collectability of those payments. We received the scheduled payments in May and December of 2009 and reversed the related reserve, resulting in the net recovery.

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2010 was $119.9 million, compared to $83.8 million for the year ended December 31, 2009, an increase of $35.2 million or 43.2%. Our results were positively impacted by improvements in North American and international steel production volumes, as well as our continued success controlling Site Operating Costs and Selling, General and Administrative Expenses.

Our Mill Services Group’s Adjusted EBITDA increased $32.1 million or 40.5%, to $111.4 million. The steel production volume of our Mill Services Group customers increased approximately 38%. In addition, five new contracts, three North American and two international, contributed $2.5 million of additional Adjusted EBITDA.

Our Raw Material and Optimization Group’s Adjusted EBITDA increased $10.3 million or 32.7% to $42.0 million driven primarily by a 42% increase in the volume of raw materials we procured for our customers. The increase in the volume we procured included several large volume shipments that carried slightly lower per ton margins, and, as a result, the average per ton margin we derived from our raw material procurement activity declined in 2010 compared to 2009. Our optimization services contributed $2.1 million of additional Adjusted EBITDA due to both new optimization contracts which contributed $0.5 million of additional Adjusted EBITDA, and an increase in volume of steel produced by customers of our optimization services.

Our Administrative segment’s expenses increased $6.3 million, or 23.0%, primarily as a result of a $5.6 million increase in incentive compensation driven by our improved operating results and an increase in professional fees of $0.6 million which were primarily incurred in the process of pursuing international opportunities.

Adjusted EBITDA Margin. Our Adjusted EBITDA Margin increased from 23.4% for the year ended December 31, 2009 to 25.7% for the year ended December 31, 2010. Our Revenue After Raw Materials Costs increased 30.1% while our Site Operating Costs increased 25.7% and our Selling, General and Administrative Costs increased 19.0%. We maintained some of the savings in overhead and administrative costs that we

 

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generated during the industry downturn in 2009. Accordingly, while our Revenue After Raw Materials Costs rose for the year ended December 31, 2010, our costs did not rise as quickly, and we were able to increase our EBITDA Margin.

Depreciation and Amortization. Depreciation expense during the year ended December 31, 2010 was $49.3 million, compared to $57.6 million for the year ended December 31, 2009, a decrease of approximately $8.3 million or 14.3%. $1.0 million of the decrease occurred due to a portion of the asset step-up associated with the Onex Acquisition being fully depreciated in 2009. In addition, lower capital expenditures during the economic downturn contributed to the year-over-year decrease. Amortization expense of $12.2 million for the year ended December 31, 2010 was comparable to that incurred for the year ended December 31, 2009.

Gain on Early Extinguishment of Debt. In April 2009, we acquired $2.0 million of face value of our senior subordinated notes due 2015 for a cash payment of $0.4 million. We wrote off $0.1 million of related unamortized deferred debt issuance costs and recorded a $1.5 million gain related to the transaction.

Goodwill Impairment. During the year ended December 31, 2009, largely as a result of a change in our forecast and the continuing global economic steel industry downturn, we tested goodwill for impairment in advance of our annual testing date and recorded a $55.0 million Goodwill Impairment charge related to the goodwill allocated to our Mill Services Group. See “—Notes to Unaudited Condensed Consolidated Financial Statements—Note 11 Goodwill.” There was no charge related to the goodwill allocated to our Raw Material and Optimization Group and we did not record an impairment charge in 2010.

Disposition of Cumulative Translation Adjustment. In 2009, we ceased activity in one of our foreign subsidiaries and as a result recorded a non-cash charge of $1.6 million as amounts that were previously recorded in our cumulative translation adjustment were reclassified to our statement of operations. There was no corresponding activity or charge for 2010. See “Application of Critical Accounting Policies—Foreign Currency Translation.”

Interest Expense, Net. Interest Expense, Net for the year ended December 31, 2010, decreased $4.5 million or 10.0% from the year ended December 31, 2009. The decrease was partially driven by the March 31, 2010 expiration of certain interest rate swap agreements which carried a higher fixed rate. During the year ended December 31, 2010, we had outstanding interest rate swap agreements with a notional amount of $120.0 million and a fixed LIBO rate averaging 4.65%. Those agreements remained outstanding through March 31, 2010, but were then replaced by swap agreements with a total notional amount of $80.0 million and an average fixed LIBO rate of 2.25%. As a result of the lower swap notional amount and the lower rate, interest expense was reduced by $2.2 million. Additionally, interest expense on our senior secured term loan credit facility was $1.3 million lower as we benefited from lower indexed rate and lower spreads as our leverage ratio improved. Finally, interest expense on our ABL facility was $1.5 million lower as we reduced the average outstanding balance.

Income Tax Expense/Benefit. Income tax expense for the year ended December 31, 2010 was $10.6 million or 61.5% of or our pre-tax income compared to a $6.9 million benefit or 8.0% of our pre-tax loss for the year ended December 31, 2009. The effective tax rate for the year ended December 31, 2010 differs from the statutory rate of 35% due principally to state taxes; permanent differences related to non-deductible marketing expenses, foreign deemed dividends and valuation allowances on foreign tax credits and other items which are significant relative to our forecasted pre-tax income for the year. The effective rate for the year ended December 31, 2009 differs from the statutory rate largely due to the impact of the Goodwill Impairment charge, which is not deductible for tax purposes, on our pre-tax book loss.

 

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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

The following table sets forth each of the line items in our statement of operations for each of the periods indicated as well as the variances between the periods in terms of dollar amounts and percentage. The table also provides a reconciliation of Total Revenue to Revenue After Raw Materials Costs for each of the periods presented.

 

(dollars in thousands)    Year ended
December 31,
    Variances  
     2008     2009     $     %  

Statement of Operations Data:

        

Revenue:

        

Revenue from Sale of Materials

   $ 2,595,608      $ 986,304      $ (1,609,304     -62.0

Service Revenue

     387,305        312,035        (75,270     -19.4
                          

Total Revenue

     2,982,913        1,298,339        (1,684,574     -56.5

Costs and Expenses:

        

Cost of Raw Materials Shipments

     2,515,425        939,993        (1,575,432     -62.6

Site Operating Costs

     298,394        233,120        (65,274     -21.9

Selling, General and Administrative Expenses

     56,750        44,638        (12,112     -21.3

Provision for (Recovery of) Bad Debts

     9,166        (5,419     (14,585     —     

Provision for Transition Agreement

     —          2,243        2,243        —     

Depreciation and Amortization

     73,080        69,760        (3,320     -4.5
                          

Total Costs and Expenses

     2,952,815        1,284,335        (1,668,480     -56.5
                          

Income from Operations

     30,098        14,004        (16,094     -53.5

Gain on Early Extinguishment of Debt

     —          1,505        1,505        —     

Goodwill Impairment

     —          (55,000     (55,000     —     

Disposition of Cumulative Translation Adjustment

     —          (1,560     (1,560     —     

Interest Expense, Net

     (38,079     (44,825     (6,746     17.7
                          

Income (Loss) Before Income Taxes

     (7,981     (85,876     (77,895     -976.0

Income Tax Benefit

     1,891        6,885        4,994        264.1
                          

Net Loss

   $ (6,090   $ (78,991   $ (72,901     -1197.1
                          

Other Financial Data:

        

Revenue After Raw Materials Costs:

        

Consolidated:

        

Total Revenue

   $ 2,982,913      $ 1,298,339      $ (1,684,574  

Cost of Raw Materials Shipments

     (2,515,425     (939,993     1,575,432     
                          

Revenue After Raw Materials Costs

   $ 467,488      $ 358,346      $ (109,142     -23.3
                          

Mill Services Group:

        

Total Revenue

   $ 530,691      $ 377,825      $ (152,866  

Cost of Raw Materials Shipments

     (127,462     (59,160     68,302     
                          

Revenue After Raw Materials Costs

   $ 403,229      $ 318,665      $ (84,564     -21.0
                          

Raw Material and Optimization Group:

        

Total Revenue

   $ 2,451,919      $ 920,239      $ (1,531,680  

Cost of Raw Materials Shipments

     (2,388,060     (880,733     1,507,327     
                          

Revenue After Raw Materials Costs

   $ 63,859      $ 39,506      $ (24,353     -38.1
                          

Administrative:

        

Total Revenue

   $ 303      $ 275      $ (28  

Cost of Raw Materials Shipments

     97        (100     (197  
                          

Revenue After Raw Materials Costs

   $ 400      $ 175      $ (225  
                          

Adjusted EBITDA:

        

Net Loss

   $ (6,090   $ (78,991   $ (72,901  

Income Tax Benefit

     (1,891     (6,885     (4,994  

Interest Expense, Net

     38,079        44,825        6,746     

Depreciation and Amortization

     73,080        69,760        (3,320  

Goodwill Impairment

     —          55,000        55,000     

Gain on Early Extinguishment of Debt

     —          (1,505     (1,505  

Disposition of Cumulative Translation Adjustment

     —          1,560        1,560     
                          

Adjusted EBITDA

   $ 103,178      $ 83,764      $ (19,414     -18.8
                          

Adjusted EBITDA by Operating Segment:

        

Mill Services Group

   $ 94,710      $ 79,279      $ (15,431     -16.3

Raw Material and Optimization Group

     42,340        31,655        (10,685     -25.2

Administrative Expenses

     (33,872     (27,170     6,702        -19.8
                          

Adjusted EBITDA

   $ 103,178      $ 83,764      $ (19,414     -18.8
                          

Adjusted EBITDA Margin

     22.1     23.4    

 

62


Table of Contents

Revenue from Sale of Materials. Revenue from Sale of Materials was $986.3 million in 2009, compared to $2,595.6 million in 2008. Revenue from Sale of Materials is primarily generated by our raw materials procurement activities, which produced $915.6 million or 93% of Revenue from Sale of Materials in 2009, and $2,445.2 million or 94% of Revenue from Sale of Materials in 2008. The remaining Revenue from Sale of Materials of $70.7 million in 2009 and $150.4 million in 2008 is primarily generated by our Mill Services Group location where we buy, process and sell raw materials for our own account.

Revenue from Sale of Materials declined 62.0% in 2009, compared to 2008, as the market price and volume of raw materials we procured for our customers declined due to the global economic crisis and resulting decrease in demand for steel in North America and worldwide. Our Cost of Raw Materials Shipments declined by a similar percentage, 62.6%. The same decreases in market price and volume that caused lower Revenue from Sale of Materials also resulted in lower costs to procure the materials.

Service Revenue. Service Revenue was $312.0 million in 2009, compared to $387.3 million in 2008. Service Revenue is primarily generated by our Mill Services Group, which produced $306.6 million and $380.3 million of Service Revenue in 2009 and 2008, respectively. The Mill Services Group accounted for approximately 98% of Service Revenue in each year, with the remainder generated by optimization services from our Raw Material and Optimization Group.

Our Service Revenue is largely generated on the basis of the volume of steel that our customers produce and the base monthly fees and tiered pricing arrangements that our contracts typically include. Due to the global economic crisis, the volume of steel produced by our customers declined by an unprecedented approximately 34% in 2009, compared to 2008, resulting in a 19.4% decline in our Service Revenue. The percentage decline in Service Revenue was less than the percentage decline in our customers’ production volumes due to base monthly fees and tiered pricing arrangements and an additional $33.8 million in revenue from customer sites and contracts added during 2008 and 2009, including:

 

   

four customer sites in the United Kingdom resulting from the acquisition of Hanson that were included in the full year of 2009 but only for a partial year in 2008, which contributed an additional $16.7 million of Service Revenue;

 

   

two new customer sites elsewhere in Europe where we began providing services in 2009, which contributed an additional $6.0 million of Service Revenue; and