SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.(Exact name of Registrant as specified in its charter)
350 South Grand Avenue, Suite 5100Los Angeles, California 90071(213) 687-7700(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No
As of October 31, 2001, 31,569,601 shares of the registrant’s common stock, no par value, were outstanding.
RELIANCE STEEL & ALUMINUM CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS(In thousands except share amounts)
ASSETS
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME(In thousands except share and per share amounts)
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation, with respect to the interim financial statements have been included. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results for the full year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2000, included in the Reliance Steel & Aluminum Co. (“Reliance” or “the Company”) Annual Report on Form 10-K.
2. Acquisitions
On July 2, 2001, through its recently-formed subsidiary, PDM Steel Service Centers, Inc. (“PDM”), the Company purchased the assets and assumed certain liabilities of the steel service centers division of Pitt-Des Moines, Inc., a publicly-held company, for approximately $93,100,000. Approximately one-half of the purchase price was paid in cash and one-half was paid by promissory note, which was paid off on July 6, 2001, following completion of a public equity offering. PDM processes and distributes carbon steel products consisting primarily of structurals and plate for the capital goods and construction industries. The steel service centers of Pitt-Des Moines, Inc. had sales of approximately $97,000,000 for the six months ended June 30, 2001. PDM operates as a wholly-owned subsidiary of the Company. PDM is headquartered in Stockton, California, and has additional facilities in Fresno and Santa Clara, California; Sparks, Nevada; Spanish Fork, Utah; Cedar Rapids, Iowa; and the General Steel Corporation facility in Woodlands, Washington. The cash portion of this acquisition was funded with borrowings under the Company’s revolving credit facility.
On January 19, 2001, the Company acquired Aluminum and Stainless, Inc. (“A&S”), a privately-held metals service center in Lafayette, Louisiana. A&S processes and distributes primarily aluminum sheet, plate and bar products and had sales of approximately $22,000,000 for the year ended December 31, 2000. A&S operates as a wholly-owned subsidiary of the Company. The acquisition of A&S was funded with borrowings under the Company’s line of credit. In March 2001, A&S opened a branch in New Orleans, Louisiana, established by the purchase of certain assets of an existing metals service center.
On January 18, 2001, the Company acquired Viking Materials, Inc. (“Viking”), a privately-held metals service center in Minneapolis, Minnesota, and a related company, Viking Materials of Illinois, Inc. (“Viking Illinois”), near Chicago, Illinois. Viking provides value-added processing and distribution of primarily carbon steel flat-rolled products and, with Viking Illinois, had combined sales of approximately $90,000,000 for the year ended December 31, 2000. Viking Illinois operates as a wholly-owned subsidiary of Viking, and Viking operates as a wholly-owned subsidiary of the Company. The acquisition of Viking and Viking Illinois was funded with borrowings under the Company’s line of credit.
These transactions have been accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated statements of income include the revenues and expenses of each acquisition since its respective acquisition date. The consolidated financial statements reflect the preliminary allocation of the purchase price. The allocations of purchase price were based upon the preliminary fair values of the net assets purchased. The Company has adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as they relate to the allocation of the purchase price and amortization of related intangibles related to the PDM acquisition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(UNAUDITED)
3. Long-Term Debt
Long-term debt consists of the following:
The Company had a syndicated credit agreement with four banks for an unsecured revolving line of credit with a borrowing limit of $200,000,000 which was terminated on October 24, 2001, when it was replaced by a $335,000,000 five-year unsecured line of credit. The new syndicated credit facility is with nine banks and may be increased to $400,000,000. The Company also had a credit agreement that allowed the Company to issue and have outstanding up to a maximum of $10,000,000 of letters of credit. On October 20, 2000, the Company executed an amendment to this credit agreement, providing a cash advance facility of $50,000,000 due April 20, 2001. In February 2001, the cash advance was paid off through an exchange of debt using the Company’s revolving line of credit. An additional amendment was executed in April 2001, extending the $50,000,000 cash advance facility to December 31, 2001. This credit agreement was terminated upon the completion of the refinancing of the Company’s syndicated facility on October 24, 2001. As of September 30, 2001, there were no borrowings outstanding under the cash advance facility. The Company has $290,000,000 of outstanding senior unsecured notes issued in private placements of debt. These notes bear interest at a weighted average fixed rate of 6.83% and have an average life of 9.6 years, maturing from 2002 to 2010.
The Company’s long-term loan agreements require the maintenance of a minimum net worth and include certain restrictions on the amount of cash dividends payable, among other things.
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4. Shareholders’ Equity
On July 5, 2001 the Company issued 6,325,000 shares of its common stock in a public equity offering, including the shares issued on exercise of the over-allotment option, at a price of $25.00 per share for total net proceeds of approximately $149,756,000, after deducting the underwriting discount and estimated offering expenses. The Company used the net proceeds to pay down debt related to the July 2, 2001 acquisition of the steel service centers division of Pitt-Des Moines, Inc., and debt related to other acquisitions, capital expenditures and general working capital needs.
In March 2001, 8,334 shares of common stock were issued to division managers of the Company under the Key-Man Incentive Plan for 2000.
On October 30, 2000, the Company purchased 2,270,000 shares of its common stock at a cost of $19.35 per share under its Stock Repurchase Plan in a private transaction. The stock was purchased from a trust, which is one of the Company’s largest shareholders. Thomas W. Gimbel, a member of the Board, is a co-trustee of the trust from which the shares were acquired. The Stock Repurchase Plan allows the Company to purchase up to 6,000,000 shares of its common stock from time to time in the open market or in privately-negotiated transactions. Repurchased shares are redeemed and treated as authorized but unissued shares. As of September 30, 2001, the Company had repurchased a total of 5,538,275 shares of its common stock under the Stock Repurchase Plan, at an average cost of $14.94 per share. The Company did not repurchase any shares during the nine months ended September 30, 2001.
Accumulated other comprehensive loss of $1,122,000 and $308,000 at September 30, 2001 and December 31, 2000, respectively, consists of foreign currency translation adjustments.
5. Earnings Per Share
The Company calculates basic and diluted earnings per share as required by Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is calculated including the dilutive effects of warrants, options, and convertible securities, if any. The following table sets forth the computation of basic and diluted earnings per share:
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The computations of earnings per share for the three and nine months ended September 30, 2000 do not include 385,000 shares of stock options, and for the three months ended September 30, 2001, do not include 37,500 shares of stock options because their inclusion would have been anti-dilutive. There were no anti-dilutive shares of stock options for the nine months ended September 30, 2001, due to fluctuations of the average market price.
6. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 is effective for any business combinations completed after June 30, 2001 and SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company has adopted the provisions of SFAS No. 141 for acquisitions completed subsequent to June 30, 2001. The Company will apply the new rules on accounting for goodwill beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain income statement data for each of the periods indicated (dollars are shown in thousands and certain amounts may not calculate due to rounding):
Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 (dollar amounts in thousands)
In the three months ended September 30, 2001, consolidated net sales decreased 3.1% to $430,066, compared to the same period of 2000. This includes an increase of 14.1% in tons sold and a decrease in the average selling price per ton of 15.5%. Tons sold increased because the 2001 period included the sales of companies acquired in 2001 and late 2000, with $45,000 of sales from the July 2001 acquisition of the net assets of the metals service center business of Pitt-Des Moines, Inc. The average selling price decreased for the 2001 period from both lower metals pricing for most products we sell and from a shift in product mix. Our 2001 acquisitions sell primarily carbon steel products and have increased our percentage of carbon steel products sold by 5.8% to 56.4% in the 2001 quarter as compared to the same quarter of 2000.
Same-store sales (excluding sales of the businesses we acquired since the beginning of 2000) decreased $86,580, or 20.2%, in the three months ended September 30, 2001. The 2001 period tons sold decreased by 11.6%, and the average selling price per ton decreased by 9.6% from the 2000 period. The decrease in same-store tons sold reflects the current business environment, where demand for most products we sell continued to deteriorate throughout the third quarter of 2001, and was further impacted by the tragic events of September 11th. The decrease in the same- store average selling price was primarily due to the lower metals costs for most products during 2001 which continued to decline during the third quarter. We also experienced a change in product mix away from the high-priced products sold to the semiconductor, electronics and related industries that contributed to the decline in our average selling price.
Total gross profit remained flat at $118,395 for the third quarter of 2001 compared to $118,398 in the third quarter of 2000, even though we experienced a 3.1% sales decline. This was due to our gross profit percentage increasing to 27.5% in the three months ended September 30, 2001, from 26.7% in the three months ended September 30, 2000. The improved gross profit percentage is consistent with the 2001 second quarter gross profit percentage of 27.9% and is mainly due to our disciplined sales force maintaining selling prices and management focus on inventory turnover that allows us to react quickly to changes in metals costs.
Warehouse, delivery, selling, general and administrative (“S,G&A”) expenses increased $12,570, or 15.9%, in the third quarter of 2001 compared to the corresponding period of 2000 and amounted to 21.3% of sales in the 2001 third quarter and 17.8% of sales in the 2000 third quarter. The dollar increase in S,G&A expenses includes the expenses of the businesses we acquired after the third quarter of 2000. The third quarter of 2001 S,G&A expense as a percent of sales is up from the 2000 third quarter mainly due to the effect of the lower sales volume and lower pricing
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being experienced throughout the Company.
Depreciation and amortization expense increased $1,186, or 16.4%, during the three months ended September 30, 2001, compared to the corresponding period of 2000. This increase is primarily because of the depreciation expense related to the assets of the businesses we acquired after the 2000 third quarter, and the amortization of goodwill resulting from the businesses we acquired after the 2000 third quarter.
Interest expense decreased by 11.5% to $6,115 in the 2001 third quarter compared to $6,909 in the 2000 third quarter, mainly because we were able to pay down debt with the proceeds from the July equity offering and with cash generated from operations. Lower interest rates during 2001 also contributed to the decrease in interest expense.
Equity in earnings of our 50%-owned company, American Steel, L.L.C., decreased $389 in the 2001 period compared to the 2000 period primarily due to the current economic conditions, with the Pacific Northwest region being especially weak, mainly related to the truck trailer and railcar markets serviced by American Steel, L.L.C.
Our effective income tax rate increased to 40.6% for the 2001 third quarter, compared to 40.0% for the 2000 third quarter, mainly due to shifts in our geographic composition.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 (dollar amounts in thousands)
Consolidated net sales were $1,274,953 for the nine months ended September 30, 2001, a decrease of 3.1% from the nine months ended September 30, 2000. The 2001 nine-month sales represent an increase of 3.8% in tons sold and a decrease in the average selling price per ton of 6.3%. The increase in tons sold was mainly due to the inclusion during the 2001 period of the sales from the businesses we acquired in 2000 and 2001. The average selling price decreased for the 2001 period primarily from both lower metals pricing for most products sold by the Company and from a shift in product mix.
Our same-store sales decreased $177,239, or 13.7%, in the 2001 nine-month period. Same-store tons sold decreased by 10.5% due to continued deterioration of the demand for most products we sell. The same-store average selling price per ton decreased by 3.6% mainly due to lower metal costs for most of our products during 2001. We also experienced a shift in product mix away from sales of higher-priced products to the semiconductor and related electronics industries to more lower-priced carbon steel products. Our one area of strength in 2001, sales for the aerospace industry, increased 7.7% on a same-store tons sold basis during the nine months of 2001, as compared to 2000.
Total gross profit was $353,534 for the first nine months of 2001, a 0.3% decrease, compared to $354,551 in the first nine months of 2000. The 2001 amount includes the gross profit on sales from the companies acquired after the first nine months of 2000. As a percentage of sales, gross profit increased to 27.7% in the nine months ended September 30, 2001, from 27.0% in the nine months ended September 30, 2000. The improved gross profit percentage was mainly due to a continued focus on inventory turnover and due to our disciplined sales force maintaining selling prices.
S,G&A expenses for the nine months ended September 30, 2001 increased $20,368 compared to the corresponding period of 2000, mainly because we included the S,G&A expenses of the businesses we acquired in 2001 and 2000. S,G&A expenses were 20.3% as a percent of sales for the nine-month period of 2001, up from 18.1% for the same nine-month period of 2000. The increase as a percent of sales was because of both the lower sales volumes being experienced throughout the Company and the lower metals pricing in 2001. On a same-store basis, S,G&A expense decreased $4,139 in the 2001 period, mainly due to employee workforce reductions in reaction to the lower sales volumes. Since December 31, 2000, we have reduced our employee headcount by 9.7%.
Depreciation and amortization expense increased $2,807, or 13.3%, during the nine months ended September 30, 2001, compared to the corresponding period of 2000. This increase is primarily due to the inclusion of both the depreciation expense and amortization of goodwill related to our acquisitions made after September 30, 2000.
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Interest expense increased by 13.0% to $21,007 in the nine months of 2001 compared to $18,586 in the 2000 period, due to the increased borrowings used to fund acquisitions, but was offset somewhat by the current year debt pay downs and lower interest rates.
Equity in earnings of 50%-owned company decreased $1,797 in the first nine months of 2001 compared to the 2000 period, primarily due to the current economic conditions.
Our effective income tax rate was 39.4% for the first nine months of 2001, compared to 40.0% for the same nine months of 2000. The change in our effective rate was primarily due to shifts in our geographic composition and the implementation of certain tax planning strategies during the latter half of 2000.
Liquidity and Capital Resources (dollar amounts in thousands)
At September 30, 2001, working capital amounted to $392,749 compared to $347,659 at December 31, 2000. The increase was primarily due to the additional working capital from our 2001 acquisitions but was offset by decreases in our receivables and inventory. Our receivables and inventory levels decreased due to the decline in sales volumes we have continued to experience throughout 2001. Our capital requirements are primarily for working capital, acquisitions, and capital expenditures for continued improvements in plant capacities and materials handling and processing equipment.
Our primary sources of liquidity are generally from internally generated funds from operations and our revolving line of credit. Our bank facilities at September 30, 2001 allowed for an aggregate of $250,000 in borrowings, with a $200,000 borrowing limit from a syndicated credit facility and an additional $50,000 cash advance available on a second credit facility. At September 30, 2001, $63,000 was outstanding under the $200,000 credit facility and no amounts were outstanding under the cash advance facility. On October 24, 2001, we completed an agreement to renew and expand our revolving credit facility to $335,000. The new $335,000 unsecured five-year revolving credit facility syndication replaced the $200,000 unsecured credit facility and the $10,000 letter of credit agreement that also provided for a $50,000 cash advance facility, both of which were due to mature on October 22, 2002. The agreement allows the Company to increase the new facility to $400,000.
We also have senior unsecured notes outstanding in the aggregate amount of $290,000. The senior notes have maturity dates ranging from 2002 to 2010, with an average life of 9.6 years. The senior notes bear interest at a weighted average fixed rate of 6.83% per annum.
Our operations provided cash of $78,854 in the nine months ended September 30, 2001, as compared to $10,690 of cash used in operations during the corresponding period of 2000, primarily due to decreased inventory and receivables levels in line with the lower sales volumes experienced in 2001.
Our capital expenditures, excluding acquisitions, were $19,990 for the nine months ended September 30, 2001. We had no material commitments for capital expenditures as of September 30, 2001. The purchases of Aluminum and Stainless and Viking Materials were funded with borrowings on our line of credit. The acquisition of the steel service centers division of Pitt-Des Moines, Inc. on July 2, 2001 for approximately $93,100 was funded by borrowings on our line of credit and by a promissory note which was paid off with the net proceeds received from our public equity offering. On July 5, 2001, we issued 6,325,000 shares of our common stock, including the shares issued on exercise of the over-allotment option, at a price of $25.00 per share for total net proceeds of approximately $149,756, after deducting the underwriting discount and estimated offering expenses. The proceeds were used to reduce debt related to the July 2, 2001 acquisition and debt related to other acquisitions, capital expenditures and general working capital needs. We anticipate that funds generated from operations, and funds available under our new line of credit will be sufficient to meet our working capital needs for the foreseeable future.
Seasonality
Some of our customers may be in seasonal businesses, especially customers in the construction industry. As a result of our geographic, product and customer diversity, however, our operations have not shown any material seasonal trends. Revenues in the months of November and December traditionally have been lower than in other months because of a reduced number of working days for shipments of our products and holiday closures for some of our customers. We cannot assure you that period-to-period fluctuations will not occur in the future. Results of any one or more quarters are therefore not necessarily indicative of annual results.
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Market Risk
In the ordinary course of business, we are exposed to various market risk factors, including changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates, and metal pricing and availability. Additionally, we are exposed to market risk primarily related to our fixed rate long-term debt. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. Decreases in interest rates may affect our market value of fixed rate debt. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Based on our debt, we do not consider the exposure to interest rate risk to be material. Our fixed rate debt obligations are not callable until maturity.
This Form 10-Q may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has no control. These risk factors and additional information are included in the Company’s Annual Report on Form 10-K and the Company’s Prospectus dated June 28, 2001 filed under Rule 424(b).
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.10 Credit Agreement for the $335 Million Syndicated Credit Facility dated October 24, 2001.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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