Novamerican Steel Reports 2nd Quarter Results
07/16/2008 - Novamerican Steel reports a net loss of $4.4 million on net sales of $241.3 million for the second fiscal quarter ended May 31, 2008.
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On November 15, 2007, the former Symmetry Holdings Inc. completed the acquisition of Novamerican Steel Inc. and its subsidiaries. Subsequent to the acquisition, Symmetry changed its name to Novamerican Steel Inc., and changed its fiscal year from December 31 to the last Saturday of November.
The second fiscal quarter of 2008 included fourteen weeks of operations, whereas the second fiscal quarter of 2007 included thirteen weeks. For consistency and relevance, the company has compared second fiscal quarter results of operations to the pro forma 2007 second fiscal quarter. |
Second Quarter Results—Net sales increased $28.9 million (13.6%) to $241.3 million, as compared to net sales of $212.4 million in the pro forma second fiscal quarter of 2007. Excluding the impact of exchange rates, net sales would have increased by $13.1 million (6.1%).
Total tons increased by 2.4% to 401,300 tons as compared to 391,900 tons in the pro forma second fiscal quarter of 2007. Direct sales tons increased by 2.5% to 232,400 (57.9% of total tons), vs. 226,700 tons (57.8% of total tons) in the pro forma second fiscal quarter of 2007.
Gross margin increased 18.8% to $49.3 million (20.4%) of net sales, as compared to $41.5 million (19.5% of net sales) in the pro forma second fiscal quarter of 2007. Exchange rates resulted in an increase of $2.8 million; excluding the impact of exchange rates, gross margin would have increased by $5.0 million to $46.5 million (20.6% of net sales).
Operating expenses increased $15.9 million (56.2%) to $44.3 million, as compared to $28.4 million in the pro forma second fiscal quarter of 2007. In addition to the $4.9-million restructuring charge, operating expenses included $3.5 million from higher depreciation and amortization associated with the purchase-price allocation for fixed assets and other intangible assets, including accelerated depreciation on assets at Cambridge. The impact of exchange rates on operating expenses was an increase of $2.2 million. Excluding the impact of exchange rates, the restructuring charge and higher depreciation and amortization, operating expenses would have increased $5.3 million to $33.7 million.
Operating expenses included a $4.9-million restructuring charge associated with closure of the Cambridge facility and the implementation of organizational changes in the replenishment, processing, distribution and sales processes. An additional restructuring charge of approximately $3.0 million is anticipated in the third fiscal quarter of 2008. These changes will result in approximately $10.0 million, net, in annual operating expense reduction, with that resulting run rate realized by end of 2008.
Adjusted EBITDA decreased by $1.7 million (9.4%) to $16.3 million, as compared to $18.0 million in the pro forma second fiscal quarter of 2007.
Long-term debt at May 31, 2008 was $399.8 million, and cash and cash equivalents were $12.4 million (or a net debt of $387.4 million).
Management Comments—"Our second fiscal quarter of 2008 continued experiencing positive momentum throughout the quarter from improved shipments and pricing, mitigated by an extremely weak automotive sector, including for us, the negative impact of the American Axle strike on General Motors,” said Corrado De Gasperis, CEO of Novamerican. “Our direct sales tons and revenue were lower than previously anticipated by about 38,000 tons. We implemented a significant portion of our organizational changes during the second quarter, including the closure of our Cambridge, Ont., facility.
“We anticipate having substantially all of our organizational changes concluded by the end of the third fiscal quarter, including new agreements with our supply-side trading partners. We incurred approximately $1.0 million in the 2008 second fiscal quarter for operating expenses for training, development and recruiting associated with this effort.”
Liquidity and Capital Resources—Long-term debt at May 31, 2008 was $399.8 million with $12.4 million of cash and cash equivalents (or a net debt of approximately $387.4 million). On November 24, 2007, our long-term debt was approximately $390.6 million with $19.6 million of cash and cash equivalents (or a net debt of approximately $371.0 million).
As of May 31, 2008, the aggregate borrowing base was $167.5 million (including the $15.0 million availability block), of which $1.9 million was utilized for letter of credit obligations and approximately $84.8 million was outstanding under the ABL Credit Facility. At May 31, 2008, approximately $80.8 million was available for future borrowings.
"Our business strategies place the highest priority on reducing variation throughout our system and accelerating the amount and speed of cash generated every day,” commented De Gasperis. “Our focus on improving the speed that we replenish our system daily will result in improved cycle times that we now believe will result in a permanent cash inventory reduction of at least $60 million."
Outlook—The company said that it expects volumes in the third fiscal quarter of 2008 to be comparable with the second fiscal quarter of 2008, including continued strong demand from its distribution and structural tubing customers. The company’s automotive business is seasonally weaker in the third fiscal quarter, and certain customers have already announced extended summer shutdowns. The company anticipates that this relative weakness will be somewhat offset by resolution of the strike at American Axle and its impact on General Motors.
Liquidity and Capital Resources—Long-term debt at May 31, 2008 was $399.8 million with $12.4 million of cash and cash equivalents (or a net debt of approximately $387.4 million). On November 24, 2007, our long-term debt was approximately $390.6 million with $19.6 million of cash and cash equivalents (or a net debt of approximately $371.0 million).
As of May 31, 2008, the aggregate borrowing base was $167.5 million (including the $15.0 million availability block), of which $1.9 million was utilized for letter of credit obligations and approximately $84.8 million was outstanding under the ABL Credit Facility. At May 31, 2008, approximately $80.8 million was available for future borrowings.
"Our business strategies place the highest priority on reducing variation throughout our system and accelerating the amount and speed of cash generated every day,” commented De Gasperis. “Our focus on improving the speed that we replenish our system daily will result in improved cycle times that we now believe will result in a permanent cash inventory reduction of at least $60 million."
Outlook—The company said that it expects volumes in the third fiscal quarter of 2008 to be comparable with the second fiscal quarter of 2008, including continued strong demand from its distribution and structural tubing customers. The company’s automotive business is seasonally weaker in the third fiscal quarter, and certain customers have already announced extended summer shutdowns. The company anticipates that this relative weakness will be somewhat offset by resolution of the strike at American Axle and its impact on General Motors.
Overall, the company said that it is expecting its third fiscal quarter to result in comparable revenue, higher cost of steel, lower operating expenses and comparable operating profit when compared to its 2008 second fiscal quarter. The company said that cash flows from operations would likely be stronger, resulting primarily from higher sources of cash from earnings and working capital and seasonally lower uses for interest payments.
The company also said that it has finalized, scheduled and commenced project plans for implementing its operating methodology at Novamerican, effectively operating it as one system versus 21 separate facilities. The company believes its new methodology will
The company also said that it has finalized, scheduled and commenced project plans for implementing its operating methodology at Novamerican, effectively operating it as one system versus 21 separate facilities. The company believes its new methodology will
(a) enable the system to operate at much faster cycle times, enabling practical capacity of approximately 2.5 million tons per annum and maximizing the throughput from the sale of such capacity
(b) facilitate a permanent cash inventory reduction of at least $60.0 million, primarily from this faster replenishment and operating cycle
(c) implement organizational changes, especially in replenishment, processing, distribution and sales processes. This includes the closure of our Cambridge, Ont., processing facility, which was completed in May 2008, and consolidation of that facility’s activities with the company’s Stoney Creek processing center located in Hamilton, Ont.
The company said that these organizational changes and the closure of the Cambridge facility will result in approximately $10.0 million, net, in annual operating expense reductions, with that resulting run rate realized by the end of 2008. The company had incurred approximately $1.0 million in the 2008 second fiscal quarter for operating expenses associated with hiring, training and development required for these changes and other organizational expenses. A restructuring charge of approximately $4.9 million was recorded, and approximately $1.0 million in restructuring cash payments was incurred in the second fiscal quarter of 2008. Additional restructuring charges of approximately $3 million are expected to be incurred in the third fiscal quarter of 2008. The plan also includes increasing resources in certain areas such as replenishment, production scheduling, statistical process control, sales, marketing and human resources.
The company also said that it expects cash interest payments to be approximately $40.0 million in fiscal 2008 with approximately $1.0 million expected in the third fiscal quarter of 2008. Capital expenditures totaled $4.4 million in the first two fiscal quarters of 2008, including $3.1 million for the Morrisville, Pa., structural tubing facility expansion. Capital expenditures are expected to total approximately $11.0 million in fiscal 2008, with approximately $3.0 million for maintenance capital and $6.0 million for completion of the expansion at the Morrisville facility. An additional $2.0 million is planned for enhancements to other processing and manufacturing facilities.
Depreciation, amortization and the purchase price allocation to inventory for fiscal 2008 are expected to be approximately $26.7 million. This includes routine depreciation of $9.7 million and $2.5 million, $8.0 million and $6.7 million associated with the amortization of the purchase price allocation for plant and equipment, intangibles (other than goodwill) and inventory, respectively.
“We remain cautious about the overall economy but look forward to the positive cash flow in the third and fourth quarters resulting from our improved cycle times and resulting permanent reductions in inventory levels,” commented De Gasperis. “This will have the most meaningful impact for Novamerican, not just in terms of strong liquidity but also in terms of enabling a much faster and more reliable delivery system that will result in higher asset turnover and utilization.”
Depreciation, amortization and the purchase price allocation to inventory for fiscal 2008 are expected to be approximately $26.7 million. This includes routine depreciation of $9.7 million and $2.5 million, $8.0 million and $6.7 million associated with the amortization of the purchase price allocation for plant and equipment, intangibles (other than goodwill) and inventory, respectively.
“We remain cautious about the overall economy but look forward to the positive cash flow in the third and fourth quarters resulting from our improved cycle times and resulting permanent reductions in inventory levels,” commented De Gasperis. “This will have the most meaningful impact for Novamerican, not just in terms of strong liquidity but also in terms of enabling a much faster and more reliable delivery system that will result in higher asset turnover and utilization.”
