<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
California 95-1142616
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 East 25th Street
Los Angeles, California 90058
(213) 582-2272
-------------------------------------------------------------
(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 [X] No [ ]
As of July 31, 1998, 18,869,352 shares of the registrant's common
stock, no par value, were outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I -- FINANCIAL INFORMATION ............................................... 1
Consolidated Balance Sheets .......................................... 1
Consolidated Statements of Income (Unaudited) ........................ 2
Consolidated Statements of Cash Flows (Unaudited) .................... 4
Notes to Consolidated Financial Statements (Unaudited) ............... 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................ 8
PART II -- OTHER INFORMATION ................................................. 12
SIGNATURES ................................................................... 14
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
RELIANCE STEEL & ALUMINUM CO.
Consolidated Balance Sheets
(In thousands except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(unaudited) (Note)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29 $ 34,047
Accounts receivable, less allowance for doubtful accounts
of $5,396 at June 1998 and $4,343 at December 1997 148,739 117,733
Inventories 198,105 158,736
Prepaid expenses and other current assets 2,140 2,472
Deferred income taxes 9,086 9,086
--------- ---------
Total current assets 358,099 322,074
Property, plant and equipment, at cost:
Land 28,611 26,348
Buildings 109,367 95,424
Machinery and equipment 118,919 104,064
Allowances for depreciation (71,685) (64,872)
--------- ---------
185,212 160,964
Investment in 50%-owned company 30,695 28,760
Goodwill 107,784 67,258
Other assets 4,954 4,810
--------- ---------
Total assets $ 686,744 $ 583,866
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 111,269 $ 91,916
Wages and related accruals 5,670 7,658
Deferred income taxes 9,148 9,148
Current maturities of long-term debt 100 100
--------- ---------
Total current liabilities 126,187 108,822
Long-term debt 205,350 143,350
Deferred income taxes 18,466 18,530
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 5,000,000
None issued or outstanding -- --
Common stock, no par value:
Authorized shares - 100,000,000 at June 30, 1998 and
20,000,000 at December 31, 1997
Issued and outstanding shares - 18,869,352 at
June 1998 and 18,831,458 at December 1997,
stated capital 155,347 154,761
Retained earnings 181,394 158,403
--------- ---------
Total shareholders' equity 336,741 313,164
--------- ---------
Total liabilities and shareholders' equity $ 686,744 $ 583,866
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
NOTE: The Balance Sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1.
<PAGE> 4
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $ 326,184 $ 243,824
Gain on sale of real estate -- 1,008
Other income 703 638
---------- ----------
326,887 245,470
Costs and expenses:
Cost of sales 248,390 187,922
Warehouse, delivery, selling, administrative
and general 51,014 38,907
Depreciation and amortization 4,610 3,247
Interest 3,321 2,862
---------- ----------
307,335 232,938
Income before equity in earnings of 50%-owned
company and income taxes 19,552 12,532
Equity in earnings of 50%-owned company 1,641 1,401
Income before income taxes 21,193 13,933
Income taxes:
Federal 7,418 4,458
State 1,271 1,101
---------- ----------
8,689 5,559
---------- ----------
Net income $ 12,504 $ 8,374
========== ==========
Earnings per share - Diluted $ .66 $ .55
========== ==========
Weighted average shares outstanding - Diluted 19,062,000 15,364,000
========== ==========
Earnings per share - Basic $ .66 $ .55
========== ==========
Weighted average shares outstanding - Basic 18,866,000 15,158,000
========== ==========
Cash dividends declared $ .06 $ .02
========== ==========
</TABLE>
2.
<PAGE> 5
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $ 641,652 $ 445,415
Gain on sale of real estate -- 1,008
Other income 1,808 999
---------- ----------
643,460 447,422
Costs and expenses:
Cost of sales 490,112 343,376
Warehouse, delivery, selling, administrative
and general 99,550 70,520
Depreciation and amortization 8,698 5,947
Interest 6,667 4,798
---------- ----------
605,027 424,641
Income before equity in earnings of 50%-owned
company and income taxes 38,433 22,781
Equity in earnings of 50%-owned company 2,691 2,673
Income before income taxes 41,124 25,454
Income taxes:
Federal 14,394 8,145
State 2,467 2,011
---------- ----------
16,861 10,156
---------- ----------
Net income $ 24,263 $ 15,298
========== ==========
Earnings per share - Diluted $ 1.27 $ .99
========== ==========
Weighted average shares outstanding - Diluted 19,032,000 15,456,000
========== ==========
Earnings per share - Basic $ 1.29 $ 1.00
========== ==========
Weighted average shares outstanding - Basic 18,854,000 15,249,000
========== ==========
Cash dividends declared $ .12 $ .09
========== ==========
</TABLE>
3.
<PAGE> 6
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 24,263 $ 15,298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,698 5,947
Deferred income taxes (64) (110)
(Gain) loss on sales of machinery and equipment (192) 50
Gain on sale of real estate -- (1,008)
Equity in earnings of 50%-owned company (2,435) (2,464)
Changes in operating assets and liabilities:
Accounts receivable (10,116) (22,170)
Inventories (10,250) (1,116)
Prepaid expenses and other assets (87) 738
Accounts payable and accrued expenses (7,336) 8,511
---------- ----------
Net cash provided by operating activities 2,451 3,676
---------- ----------
INVESTMENT ACTIVITIES
Purchases of property, plant and equipment (11,876) (7,623)
Proceeds from sales of property and equipment 350 123
Acquisitions of metals service centers (51,252) (46,266)
Dividends received from 50%-owned company 500 1,217
---------- ----------
Net cash used in investing activities (62,278) (52,549)
---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings 68,000 155,000
Principal payments on long-term debt and short-term
borrowings (40,543) (97,410)
Dividends paid (2,263) (1,415)
Issuance of common stock 586 679
Repurchase of common stock -- (7,433)
---------- ----------
Net cash provided by financing activities 25,780 49,421
---------- ----------
(Decrease) increase in cash (34,018) 548
Cash and cash equivalents at beginning of period 34,047 815
---------- ----------
Cash and cash equivalents at end of period $ 29 $ 1,363
========== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the period $ 6,289 $ 5,780
Income taxes paid during the period $ 18,325 $ 10,840
</TABLE>
4.
<PAGE> 7
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 month and six month periods ended June 30, 1998 are not
necessarily indicative of the results for the full year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1997, included in the
Reliance Steel & Aluminum Co. Form 10-K.
In April 1998, the Company effected a short-form merger whereby Amalco Metals,
Inc. ("Amalco"), a wholly- owned subsidiary of the Company, was merged into the
Company. At that time, Amalco was combined with the existing Reliance
Metalcenter in Santa Clara in its new facility in Union City, California.
2. ACQUISITIONS
On January 30, 1998, the Company acquired 100% of the outstanding capital stock
of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix
Metals"), for $21,000,000 in cash. Phoenix Metals is headquartered in Norcross
(Atlanta), Georgia, with additional metals service centers in Birmingham,
Alabama; Tampa, Florida; and Charlotte, North Carolina. The purchase of Phoenix
Metals was funded with proceeds from the 1997 equity offering and borrowings
under the Company's line of credit. Phoenix Metals' net sales for the twelve
months ended February 28, 1997, were approximately $112,000,000.
Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Company, L.L.C. and its subsidiary, Durrett-Sheppard
Steel of Pennsylvania, Inc., through its newly-formed subsidiary, Durrett
Sheppard Steel Co., Inc. ("DSS"), for $30,500,000 in cash. DSS is a metals
service center located in Baltimore, Maryland. This purchase was funded with
proceeds from the 1997 equity offering and borrowings under the Company's line
of credit. Durrett-Sheppard Steel Co., L.L.C. had net sales of approximately
$47,000,000 for the twelve months ended September 30,1997.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 132, Employers Disclosures about Pensions and Other
Post-retirement Benefits, which is effective for financial statements for
periods beginning after December 15, 1997, and which revises and standardizes
disclosure requirements for pensions and other post-retirement benefits. The
Company will revise its disclosures as necessary upon adoption of Statement 132.
Additionally, in March 1998, Statement of Position (SOP) 98-1 was issued, which
is effective for fiscal years beginning after December 15, 1998. SOP 98-1
requires capitalization and amortization of qualified computer software costs
over its estimated useful life. There will be no impact on the Company's
earnings or financial position due to the adoption of SOP 98-1. In June1998, the
FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after June 15,
1998. Because of the Company's minimal use of derivatives there will be no
impact on the Company's earnings or financial position due to the adoption of
Statement 133.
5.
<PAGE> 8
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited) - (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Revolving line of credit ($200,000 limit) due October 22,
2002, interest at variable rates........................... $ 62,000 $ --
Senior unsecured notes due January 2, 2002 to January 2,
2009, average interest rate 7.12%.......................... 140,000 140,000
Variable Rate Demand Industrial Development Revenue
Bonds, Series 1989 A, due July 1, 2014, with interest
payable quarterly.......................................... 3,450 3,450
---------- --------
205,450 143,450
Less amounts due within one year............................. (100) (100)
-------- --------
$205,350 $143,350
======== ========
</TABLE>
In October 1997, the Company entered into a syndicated credit agreement with
five banks. This syndicated credit facility replaced the Company's existing
revolving line of credit, increasing the Company's borrowing limit to
$200,000,000. In October 1997, the Company also entered into a credit agreement
that allows the Company to issue and have outstanding up to $10,000,000 of
letters of credit. In September 1997 and November 1996, the Company entered into
agreements with insurance companies for private placements of debt in the
aggregated amounts of $65,000,000 and $75,000,000, respectively.
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.
5. SHAREHOLDERS' EQUITY
In May 1998, the Company amended its Articles of Incorporation to increase the
number of authorized shares from 20,000,000 to 100,000,000. Additionally in May
1998, the shareholders approved the adoption of a Directors Stock Option Plan
for non-employee directors. 200,000 shares have been reserved for issuance under
the Directors Stock Option Plan. Options to acquire 5,000 shares, with an
exercise price at fair market value at the date of grant, were granted to each
non-employee member effective with the approval of the plan.
In March 1998, 5,685 shares of Common Stock were issued to division managers and
officers of the Company under the 1997 Key-Man Incentive Plan.
In November 1997, the Company issued 3,595,000 new shares of its Common Stock at
an offering price of $27.625 per share in a secondary public offering. The
proceeds of $93,908,000 (net of underwriter commissions and offering costs) were
used to pay down bank debt, to fund the acquisition of Georgia Steel, and to
fund a portion of the acquisitions of DSS and Phoenix Metals.
In December 1994, the Board of Directors approved a Stock Repurchase Plan,
authorizing the Company to purchase up to 750,000 shares (increased to 1,500,000
shares in February 1995) 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 June 30, 1998, the Company
had repurchased a total of 1,350,750 shares of its Common
6.
<PAGE> 9
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited) - (continued)
Stock under the Stock Repurchase Plan, at an average cost of $11.37 per share.
No shares were repurchased by the Company during the six month period ended June
30, 1998.
6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
All weighted shares and per share amounts have been adjusted for the 3-for-2
common stock split that occurred in June 1997.
7. EMPLOYEE BENEFITS
Effective April 1, 1998, substantially all 401(k) and profit sharing plans of
the Company and its subsidiaries were combined into one master plan. This master
plan will continue to allow each subsidiary's Board of Directors to determine
independently the annual matching percentage and maximum compensation limit or
annual profit sharing contribution. Eligibility will continue in accordance with
each subsidiary's previous plan, and vesting is based on prior service.
Eligibility occurs after three months of service, and the Company contribution
vests at 25% per year, commencing one year after the employee enters the plan.
8. SUBSEQUENT EVENTS
Effective July 1, 1998, the Company acquired 100% of the stock of Chatham Steel
Corp. ("Chatham"), a privately-held metals service center headquartered in
Savannah, Georgia for $68,000,000 in cash. Chatham has additional facilities in
Columbia, South Carolina; Durham, North Carolina; Orlando, Florida;
Jacksonville, Florida; and Birmingham, Alabama. The purchase of Chatham was
funded with borrowings under the Company's line of credit. Chatham's net sales
for the year ended December 31, 1997, were approximately $166,000,000.
Additionally, effective July 1, 1998, MetalCenter, Inc. ("MetalCenter"), a
wholly-owned subsidiary of the Company, was merged into the Company through a
short-form merger. MetalCenter will operate as a Reliance division.
7.
<PAGE> 10
RELIANCE STEEL & ALUMINUM CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain income statement data for the three month
and six month periods ended June 30, 1998 and June 30, 1997 (dollars are shown
in thousands and certain amounts may not calculate due to rounding):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
----------------------------------------- -----------------------------------------
% OF % OF % OF % OF
$ NET SALES $ NET SALES $ NET SALES $ NET SALES
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES...................... $326,184 100.0% $243,824 100.0% $641,652 100.0% $445,415 100.0%
GROSS PROFIT................... 77,794 23.8 55,902 22.9 151,540 23.6 102,039 22.9
OPERATING EXPENSES............. 55,625 17.1 42,154 17.3 108,248 16.9 76,467 17.2
-------- ------- -------- ------- -------- -------- --------- -------
INCOME FROM OPERATIONS......... $ 22,169 6.8% $ 13,748 5.6% $ 43,292 6.7% $ 25,572 5.7%
======== ======= ======== ======= ======== ======== ========= =======
FIFO INCOME FROM OPERATIONS.... $ 21,442 6.6% $ 15,987 6.6% $ 44,167 6.9% $ 27,811 6.2%
======== ======= ======== ======= ======== ======== ========= =======
</TABLE>
Substantially all inventories of the Company have been stated on the last-in,
first-out ("LIFO") method. The Company uses the LIFO method of inventory
valuation for these inventories because it results in a better matching of costs
and revenues. Under the LIFO method, the effect of suppliers' price increases or
decreases is reflected directly in the cost of goods sold. During periods of
increasing prices, LIFO accounting will cause reported income to be lower than
would otherwise result from the use of the first-in, first-out ("FIFO") method
of inventory valuation. The table above includes income from operations and the
discussions that follow include analysis as if the Company used the FIFO method.
This information is for supplementary purposes only in order to facilitate a
comparison of the Company's results of operations with those of other similar
companies who use the FIFO method.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $82,360, or 33.8%, for the three months ended
June 30, 1998, compared to the same period of 1997, which reflects an increase
of 29.9% in tons sold and an increase in the average sales price per ton of
2.7%. The increase in tons sold during the 1998 period was primarily due to the
inclusion of the sales of AMI Metals, Inc. ("AMI"), acquired April 2, 1997;
Amalco Metals, Inc. ("Amalco"), acquired April 30, 1997; Service Steel Aerospace
Corp. ("SSA"), acquired October 1, 1997; Georgia Steel Supply Company ("Georgia
Steel"), acquired December 1, 1997; Phoenix Corporation ("Phoenix Metals"),
acquired January 30, 1998; and Durrett Sheppard Steel Co., Inc. ("DSS"),
acquired January 30, 1998 (collectively, the "Acquisitions"). The average
selling prices increased for the 1998 period due mainly to the change in product
mix from the 1997 period resulting from the inclusion in 1998 of the net sales
of SSA and Phoenix Metals, along with increased sales volume at AMI. These
operations primarily sell non-ferrous products, which generally have higher
prices than most other products sold by the Company. During the 1997 period, the
product mix was more heavily weighted toward carbon steel products, which
generally have lower selling prices than non-ferrous products. Excluding the
Acquisitions, the Company reported an increase of 1.8% in tons sold, which is
primarily due to general economic improvements and an increased market share in
the Company's market areas. However, on a same-store basis the average selling
price per ton decreased by 1.8% during the 1998 period, which is primarily due
to a slight decline in the selling prices of most of the Company's products,
which resulted from lower costs of these products.
8.
<PAGE> 11
Total gross profit increased $21,892, or 39.2%, in the three months ended June
30, 1998, compared to the three months ended June 30, 1997. Expressed as a
percentage of sales, gross profit increased from 22.9% in 1997 to 23.9% in 1998.
The improvement was primarily due to a decrease in LIFO costs of $727 in the
1998 period, which resulted primarily from decreased costs of most of the
Company's aluminum products, as compared to increased LIFO costs of $2,239
during the corresponding 1997 period. On a FIFO basis, gross profit was
consistent at 23.6% of sales for the three month period ended June 30, 1998,
compared to 23.8% for the three months ended June 30, 1997.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $12,107, or 31.1%, in the three month period ended June 30, 1998
compared to the corresponding period of 1997 and amounted to 15.6% and 16.0% of
sales, respectively. The dollar increase in expenses reflects the increase in
sales volume for the 1998 period, which includes the sales and related expenses
of the Acquisitions. The decrease in G&A expenses as a percentage of sales was
primarily due to increased sales volume at certain of the acquired companies,
with only a minor increase in G&A expense levels, and historically lower G&A
expenses as a percentage of sales for certain companies acquired since the 1997
period.
Depreciation and amortization expense increased 42.0% during the three months
ended June 30, 1998, compared to the corresponding period of 1997. This increase
is primarily due to the inclusion of depreciation expense related to the assets
of the Acquisitions, along with the amortization of goodwill resulting from the
Acquisitions.
Interest expense increased by 16.0% due to increased borrowings during the three
months ended June 30, 1998, as compared to the corresponding period of 1997, to
fund the Acquisitions.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $196,237, or 44.1%, for the six months ended
June 30, 1998, compared to the same period of 1997. This increase in sales
reflects an increase of 29.3% in tons sold and an increase in the average sales
price per ton of 11.3%. The increase in tons sold was primarily due to the
inclusion of the sales of the Acquisitions during the six month period ended
June 30, 1998. The average selling prices increased for the 1998 period due
mainly to the change in product mix from the 1997 period, as the product mix
shifted toward higher sales of non-ferrous products. Non-ferrous products
generally have higher prices than most other products sold by the Company,
including carbon steel products, which represented a larger portion of the
Company's sales during the 1997 period. This shift in product mix resulted from
the inclusion in 1998 of the net sales of AMI, Amalco, SSA and Phoenix Metals,
which primarily sell non-ferrous products. Excluding the Acquisitions, the
Company reported an increase of 2.8% in tons sold, and a decrease in the average
selling price per ton of 1.0%. The increase in tons sold is primarily due to
general economic improvements and an increased market share in the Company's
market areas. The decrease in the average selling price per ton for the 1998
period compared to the 1997 period resulted primarily due to lower selling
prices of most of the Company's products in the 1998 period.
Total gross profit increased $49,501, or 48.5%, in the six months ended June 30,
1998, compared to the six months ended June 30, 1997. Expressed as a percentage
of sales, gross profit increased from 22.9% in 1997 to 23.6% in 1998. The slight
improvement was primarily due to the shift in product mix to higher margin
products, resulting primarily from the inclusion of the sales of products sold
by AMI, Amalco, SSA and DSS during the 1998 period, and due to the change in
LIFO costs. During the 1998 period, LIFO costs of $875 were recorded, which
resulted primarily from increased costs of heat treated aluminum products, which
have begun to level off, and were offset by declining costs of most of the
Company's other products, as compared to LIFO costs of $2,239 during the 1997
period. On a FIFO basis, gross profit increased slightly to 23.8% of sales for
the six month period ended June 30, 1998, from 23.4% for the six months ended
June 30, 1997, primarily due to the shift in product mix.
9.
<PAGE> 12
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $29,030, or 41.2%, in the six month period ended June 30, 1998,
compared to the corresponding period of 1997 and amounted to 15.5% and 15.8% of
sales, respectively. The dollar increase in expenses reflects the increase in
sales volume for the 1998 period, which includes the sales and related expenses
of the Acquisitions.
Depreciation and amortization expense increased 46.3% during the six months
ended June 30, 1998, compared to the corresponding period of 1997. This increase
is primarily due to the inclusion of depreciation expense related to the assets
of the Acquisitions, along with the amortization of goodwill resulting from the
Acquisitions.
Interest expense increased by $1,869 due to increased borrowings during the six
months ended June 30, 1998, as compared to the corresponding period of 1997, to
fund the Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE
AND PER SHARE AMOUNTS)
At June 30, 1998, working capital amounted to $231,912 compared to $213,252 at
December 31, 1997. The slight increase was primarily due to the working capital
of companies acquired in 1998, and increases in accounts receivable and
inventory resulting from higher sales levels in the first half of 1998. The
Company's capital requirements are primarily for working capital, acquisitions,
and capital expenditures for continued improvements in plant capacities and
material handling and processing equipment.
The Company's primary sources of liquidity are from internally generated funds
from operations and the Company's revolving line of credit. On October 22, 1997,
the Company entered into a syndicated credit facility with five banks. The
Company's borrowing limit under the revolving line of credit established under
this agreement was increased to $200,000. The syndicated credit agreement allows
the Company to use up to $175,000 of the line of credit to make acquisitions. In
September 1997 and in November 1996, the Company entered into agreements with
insurance companies for private placements of debt in the aggregate amounts of
$65,000 and $75,000, respectively. The proceeds of the debt were used to fund
acquisitions, for general working capital purposes, and to reduce the borrowings
under the Company's revolving credit facility. The senior notes that were issued
in the private placements have maturity dates ranging from 2002 to 2009 and bear
interest at rates ranging from 6.76% to 7.37% per annum.
Cash provided by operations decreased slightly during the six month period ended
June 30, 1998, as compared to the corresponding 1997 period, primarily due to
working capital requirements to support the increased sales volume.
Net capital expenditures, excluding acquisitions, were $11,876 for the six
months ended June 30, 1998, with the increased expenditures primarily relating
to the new facility in Union City, California. The Company had no material
commitments for capital expenditures as of June 30, 1998. The Company is
currently in discussions with its lenders to increase its debt capacity. The
Company anticipates that funds generated from operations and funds available
under its line of credit will be sufficient to meet its working capital needs
for the foreseeable future, and the expansion of its facilities at certain of
its metals service centers currently in progress. Additional financing would be
needed to acquire additional companies.
In November 1997, the Company issued 3,595,000 new shares of its Common Stock in
a public equity offering, resulting in net proceeds of $93,908. The proceeds
from this offering were used to pay down outstanding bank debt, including the
debt incurred to fund acquisitions. At December 31, 1997, the balance of the
proceeds was invested in high quality short-term investments (classified as cash
equivalents), which, along with bank debt, was then used to fund the
acquisitions of DSS and Phoenix Metals on January 30, 1998. In May 1998, the
Company increased the number of authorized shares outstanding of its common
stock from 20,000,000 to 100,000,000 shares. This increase allows the Company to
fund future acquisitions with stock, if desired, and also allows the Company to
raise capital in the public market, if desired.
10.
<PAGE> 13
SEASONALITY
The Company recognizes that some of its customers may be in seasonal businesses,
especially customers in the construction industry. As a result of the Company's
geographic, product and customer diversity, however, the Company's operations
have not shown any material seasonal trends, although the months of November and
December traditionally have been less profitable because of a reduced number of
working days for shipments of the Company's products and holiday closures for
some of its customers. There can be no assurance 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.
IMPACT OF YEAR 2000
The Company does not anticipate that there would be a material impact on the
results of operations or cash flows of the Company related to the Year 2000
Issue. The Year 2000 Issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than the year
2000. Most of the Company's locations are converting to a new computer system
that has been certified Year 2000 compliant by the Company's software vendor. In
addition to the vendor's certification, the Company has an ongoing program to
test its systems for such compliance. This conversion began in 1994 and has been
progressing on schedule. The final conversions are scheduled to occur in June
1999, which is prior to any anticipated impact on its operating systems. A
training staff was hired in 1996 and has been solely dedicated to this
conversion project. At the Company's locations that are not being converted to
this system, assessments of the existing systems have occurred. The Company,
working with its respective software vendors, has adopted plans to make the
minor modifications required to address the Year 2000 Issue at these locations.
Management believes that the major business systems of the Company are not
vulnerable to third parties' failure to remediate their own Year 2000 Issues, as
the Company's interface with third parties, including customers and vendors,
does not involve heavily automated computer dependent communications. The
Company believes that, with the conversions to new software and modifications to
existing software, the Year 2000 Issue will not pose significant operational
problems for its computer system. In the event the remaining conversions and
modifications are not made, or are not completed timely, the Year 2000 Issue is
not expected to have a material impact on the operations of the Company, as the
products sold by the Company and the processing and delivery equipment used are
not date dependent, minimizing the impact of any Year 2000 Issues related to
meeting customer requirements.
As the Company has been incurring costs related to this project since 1994 and
no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations or cash flows related
to the Year 2000 Issue.
11.
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The annual meeting of Reliance Steel & Aluminum Co. shareholders was
held on May 20, 1998.
(b) [Need not be answered because (1) proxies for the meeting were
solicited pursuant to Regulation 14 under the Securities Act of 1934,
(2) there was no solicitation in opposition to management's nominees
as listed in the proxy statement, and (3) all such nominees were
elected.]
(c) The following is a brief description of matters voted upon at the
meeting:
Four directors were elected at the annual meeting. Joe D. Crider:
16,109,435 shares were voted for election and 379,601 shares were
withheld. David H. Hannah: 16,109,585 shares were voted for election
and 379,451 shares were withheld. Gregg J. Mollins: 16,104,755 shares
were voted for election and 384,281 shares were withheld. William I.
Rumer: 16,187,777 shares were voted for election and 301,259 shares
were withheld.
The Board of Directors proposed an increase in the number of
authorized shares of Common Stock to 100,000,000, subject to approval
by the shareholders. The increase was approved: 14,177,945 shares
were voted for the proposal, 2,279,588 shares were voted against it,
and 31,503 shares abstained.
The Board of Directors proposed a Directors Stock Option Plan,
subject to approval of the shareholders. The plan was approved:
15,126,483 shares were voted for the proposal, 1,062,385, shares were
voted against it, and 300,168 shares abstained.
The Board of Directors selected Ernst & Young as independent auditors
to audit the financial statements of the Company and its subsidiaries
for 1998, subject to ratification by the shareholders. The selection
was approved: 16,461,684 shares were voted for the proposal, 9,689,
shares were voted against it, and 17,633 shares abstained.
ITEM 5. OTHER INFORMATION.
Not applicable.
12.
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
13.
<PAGE> 16
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.
RELIANCE STEEL & ALUMINUM CO.
Dated: August 14, 1998 By: /s/ David H. Hannah
----------------------------------
David H. Hannah
President
By: /s/ Steven S. Weis
----------------------------------
Steven S. Weis
Senior Vice President and
Chief Financial Officer
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