<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, 1999
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
(323) 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, 1999, 18,514,776 shares of the registrant's common
stock, no par value, were outstanding.
<PAGE> 2
INDEX
<TABLE>
<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 .....................................................13
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,
1999 1998
------------------------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,649 $ 6,496
Accounts receivable, less allowance for doubtful accounts
of $7,282 at June 1999 and $5,816 at December 1998 173,012 156,150
Inventories 221,435 240,697
Prepaid expenses and other current assets 3,230 4,071
Deferred income taxes 13,920 12,899
------------------------------
Total current assets 414,246 420,313
Property, plant and equipment, at cost:
Land 31,860 31,202
Buildings 131,442 125,051
Machinery and equipment 147,013 137,841
Allowances for depreciation (89,678) (81,013)
------------------------------
220,637 213,081
Investment in 50%-owned company 18,824 24,942
Goodwill, net of accumulated amortization of $10,046 at June 1999
and $7,161 at December 1998 212,705 176,949
Other assets 11,433 6,110
------------------------------
Total assets $ 877,845 $ 841,395
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84,786 $ 91,615
Accrued expenses 22,818 17,768
Wages and related accruals 11,143 10,010
Deferred income taxes 9,650 9,650
Current maturities of long-term debt 150 100
------------------------------
Total current liabilities 128,547 129,143
Long-term debt 353,700 343,250
Deferred income taxes 23,200 23,200
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
Issued and outstanding shares - 18,514,776 at
June 1999 and 18,449,802 at December 1998,
stated capital 152,875 151,903
Retained earnings 219,523 193,899
------------------------------
Total shareholders' equity 372,398 345,802
------------------------------
Total liabilities and shareholders' equity $ 877,845 $ 841,395
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
NOTE: The Balance Sheet at December 31, 1998 has been derived from the audited
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.
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RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Net sales $ 384,714 $ 326,184
Other income 950 703
-------------------------------
385,664 326,887
Costs and expenses:
Cost of sales 282,496 248,390
Warehouse, delivery, selling, administrative
and general 69,185 51,014
Depreciation and amortization 6,474 4,610
Interest 6,071 3,321
-------------------------------
364,226 307,335
Income before equity in earnings of 50%-owned
company and income taxes 21,438 19,552
Equity in earnings of 50%-owned company 1,137 1,641
-------------------------------
Income before income taxes 22,575 21,193
Income taxes:
Federal 7,653 7,418
State 1,264 1,271
-------------------------------
8,917 8,689
-------------------------------
Net income $ 13,658 $ 12,504
===============================
Earnings per share - diluted $ .73 $ .66
===============================
Weighted average shares outstanding - diluted 18,618,000 19,062,000
===============================
Earnings per share - basic $ .74 $ .66
===============================
Weighted average shares outstanding - basic 18,488,000 18,866,000
===============================
Cash dividends per share $ .065 $ .06
===============================
</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,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Net sales $ 756,598 $ 641,652
Gain from SERP benefit 2,341 --
Other income 1,817 1,808
--------------------------------
760,756 643,460
Costs and expenses:
Cost of sales 560,985 490,112
Warehouse, delivery, selling, administrative
and general 131,646 99,550
Depreciation and amortization 12,441 8,698
Interest 11,910 6,667
--------------------------------
716,982 605,027
Income before equity in earnings of 50%-owned
company and income taxes 43,774 38,433
Equity in earnings of 50%-owned company 2,035 2,691
--------------------------------
Income before income taxes 45,809 41,124
Income taxes:
Federal 15,529 14,394
State 2,565 2,467
--------------------------------
18,094 16,861
--------------------------------
Net income $ 27,715 $ 24,263
================================
Earnings per share - diluted $ 1.49 $ 1.27
================================
Per share gain from SERP benefit - diluted $ .08 $ .00
================================
Weighted average shares outstanding - diluted 18,563,000 19,032,000
================================
Earnings per share - basic $ 1.50 $ 1.29
================================
Weighted average shares outstanding - basic 18,473,000 18,854,000
================================
Cash dividends per share $ .13 $ .12
================================
</TABLE>
3.
<PAGE> 6
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,715 $ 24,263
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,441 8,698
Gain from SERP benefit (2,341) --
Deferred income taxes (22) (64)
Loss (gain) on sales of machinery and equipment 22 (192)
Equity in earnings of 50%-owned company (2,035) (2,435)
Changes in operating assets and liabilities:
Accounts receivable 441 (10,116)
Inventories 40,470 (10,250)
Prepaid expenses and other assets (4,066) (87)
Accounts payable and accrued expenses (10,654) (7,336)
---------------------------
Net cash provided by operating activities 61,971 2,451
---------------------------
INVESTMENT ACTIVITIES
Purchases of property, plant and equipment (9,393) (11,876)
Proceeds from sales of property and equipment 227 350
Acquisitions of metals service centers and asset purchases of
metals service centers (70,508) (51,252)
Dividends received from 50%-owned company 8,154 500
---------------------------
Net cash used in investing activities (71,520) (62,278)
---------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 50,500 68,000
Principal payments on long-term debt and short-term
borrowings (43,681) (40,543)
Dividends paid (2,402) (2,263)
Issuance of common stock 1,285 586
---------------------------
Net cash provided by financing activities 5,702 25,780
---------------------------
Decrease in cash (3,847) (34,018)
Cash and cash equivalents at beginning of period 6,496 34,047
---------------------------
Cash and cash equivalents at end of period $ 2,649 $ 29
===========================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Interest paid during the period $ 11,540 $ 6,289
Income taxes paid during the period 18,672 18,325
</TABLE>
4.
<PAGE> 7
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999
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, 1999 are not
necessarily indicative of the results for the full year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1998, included in the
Reliance Steel & Aluminum Co. Form 10-K.
2. ACQUISITIONS
On March 1, 1999, the Company acquired 100% of the outstanding shares of
Liebovich Bros., Inc. ("LBI"), for approximately $60,000,000 in cash. LBI was a
privately-held metals service center company with one full-line metals service
center and two metals fabrication facilities in Rockford, Illinois, and a metals
service center in Wyoming (Grand Rapids), Michigan. LBI operates as a
wholly-owned subsidiary of the Company. The purchase of LBI was funded with cash
generated from operations and borrowings on the Company's syndicated credit
facility. This transaction has been accounted for under the purchase method of
accounting. Accordingly, the accompanying consolidated statements of income
include the revenues and expenses of LBI since the closing date. The financial
statements reflect the preliminary allocation of the purchase price. The
allocation of purchase price was based upon the preliminary fair values of the
net assets purchased.
In February 1999, Valex Corp., a 97%-owned subsidiary of the Company, acquired
certain assets of Advanced MicroFinish, Inc., which was a privately-held
manufacturer of electropolished tubing and fittings. The assets and business of
Advanced MicroFinish, Inc. were moved to Valex's headquarters and manufacturing
facility in Ventura, California.
5.
<PAGE> 8
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit ($200,000 limit) due October 22, 2002,
interest at variable rates, weighted average rate of
5.4% during the six months ended June 30, 1999 $ 60,500 $ 50,000
Senior unsecured notes due January 2, 2004 to January 2,
2009, average interest rate 7.22% 75,000 75,000
Senior unsecured notes due January 2, 2002 to January 2,
2008, average interest rate 7.02% 65,000 65,000
Senior unsecured notes due October 15, 2005 to October 15,
2010, average interest rate 6.55% 150,000 150,000
Variable Rate Demand Industrial Development Revenue Bonds, Series
1989 A, due July 1, 2014, with interest payable quarterly, average
rate of 2.9% during the six
months ended June 30, 1999 3,350 3,350
--------- ---------
353,850 343,350
Less amounts due within one year (150) (100)
--------- ---------
$ 353,700 $ 343,250
========= =========
</TABLE>
During 1998, the Company issued $150,000,000 of senior unsecured notes in a
private placement of debt. The proceeds were funded on November 3, 1998, and
were used to pay off bank debt in connection with recent acquisitions. In
October 1997, the Company entered into a syndicated credit agreement with five
banks which increased the Company's borrowing limit on its unsecured revolving
line of credit to $200,000,000. In October 1997, the Company also entered into a
credit agreement that allows it to issue and have outstanding up to $10,000,000
in letters of credit.
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.
4. GAIN FROM SERP BENEFIT
The Company recorded a net one-time gain of $2,341,000 due to life insurance
proceeds related to the death of one of its executives in January 1999. The
Company funds its Supplemental Executive Retirement Plan ("SERP") through the
use of life insurance policies. This gain is net of the death benefit to be
received by the deceased executive's beneficiary, under the terms of the SERP.
The insurance proceeds are not taxable to the Company, and therefore, the
Company's effective tax rate decreased due to the annualized effect of this
non-taxable gain.
6.
<PAGE> 9
5. SHAREHOLDERS' EQUITY
In August 1998, the Board of Directors approved the purchase of up to an
additional 2,500,000 shares of the Company's outstanding Common Stock through
its Stock Repurchase Plan, for a total of up to 4,000,000 shares. The Stock
Repurchase Plan was initially established in December 1994 and authorizes the
Company to purchase 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 June 30, 1999, the Company
had repurchased a total of 1,781,550 shares of its Common Stock under the Stock
Repurchase Plan, at an average cost of $14.86 per share. No shares were
repurchased by the Company during the six month period ended June 30, 1999.
In March 1999, 7,224 shares of Common Stock were issued to division managers and
officers of the Company under the 1998 Key-Man Incentive Plan.
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, 1999 and June 30, 1998 (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,
-------------------------------------------------- --------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------- --------------------------------------------------
% OF % OF % OF % OF
$ NET SALES $ NET SALES $ NET SALES $ NET SALES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES................. $384,714 100.0% $326,184 100.0% $756,598 100.0% $641,652 100.0%
GROSS PROFIT.............. 102,217 26.6 77,794 23.9 195,612 25.9 151,540 23.6
OPERATING EXPENSES........ 69,185 18.0 51,014 15.6 131,646 17.4 99,550 15.5
DEPRECIATION EXPENSE...... 4,769 1.2 3,556 1.1 9,154 1.2 6,824 1.1
-------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS.... $ 28,263 7.4% $ 23,224 7.1% $ 54,812 7.2% $ 45,166 7.0%
=======================================================================================================
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $58,530, or 17.9%, for the three months ended
June 30, 1999 compared to the same three months of 1998, which reflects an
increase of 55.7% in tons sold and a decrease in the average sales price per ton
of 25.8%. The increase in tons sold was primarily due to the inclusion of the
sales of Chatham Steel Corporation ("Chatham"), acquired July 1, 1998; Lusk
Metals, acquired September 18, 1998; American Metals Corporation ("American
Metals"), acquired October 1, 1998; Steel Bar Corporation ("Steel Bar"),
acquired October 1, 1998; Engbar Pipe & Steel Co. ("Engbar"), acquired October
5, 1998; and Liebovich Bros., Inc. ("LBI"), acquired March 1, 1999
(collectively, the "Acquisitions") during the three month period ended June 30,
1999. However, the increase from the Acquisitions was offset, in part, by a
decline in sales to the aerospace industry during the 1999 period, as compared
to the 1998 period. The average selling prices decreased for the 1999 period due
mainly to lower costs of materials and the change in product mix from the same
three month period of 1998. The change in product mix resulted primarily due to
the inclusion in 1999 of the net sales of the Acquisitions, which, except for
Lusk Metals, primarily sell carbon steel products. This has caused carbon steel
products to represent a larger percentage of the Company's product mix. As
carbon steel products generally have lower prices than non-ferrous products,
this contributed to the decline in average selling prices. In addition, the
decline in sales to the aerospace industry also contributed to the decline, as
the products sold to this market generally have higher selling prices than most
other products sold by the Company. Both sales volume and pricing to the
aerospace industry have decreased in the 1999 period as compared to the same
period of 1998. Excluding the Acquisitions, the Company reported an increase of
3.9% in tons sold, with the average selling price per ton decreasing 18.3%. The
increase in tons sold was due to general overall improvement in the market areas
served by the Company, with the exception of the aerospace market. The decrease
in average selling price is primarily due to lower costs of most of the
Company's products during the 1999 period, as compared to the 1998 period.
Total gross profit increased $24,423, or 31.4%, in the three months ended June
30, 1999 compared to the same three months of 1998, primarily due to the
inclusion of the gross profit of the Acquisitions. Expressed as a percentage of
sales, gross profit increased from 23.9% in 1998 to 26.6% in 1999. The
improvement as a percentage of sales was primarily due to certain of the
companies comprising the Acquisitions achieving higher gross profit margins than
8.
<PAGE> 11
the Company has historically achieved on a consolidated basis. In addition, the
lower costs of materials for most of the Company's products allowed for
increased gross margins as a percentage of sales due to the Company's efforts to
manage margins and deliver a high level of customer service.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $18,171, or 35.6%, in the three month period ended June 30, 1999
compared to the corresponding period of 1998 and amounted to 18.0% and 15.6% of
sales, respectively. The dollar increase in expenses reflects the increase in
sales volume for the 1999 period, which includes the sales and related expenses
of the Acquisitions. The increase as a percent of sales is primarily due to the
increased volume of products being sold at lower selling prices and due to
certain of the companies comprising the Acquisitions operating at higher expense
levels than the Company has historically operated at on a consolidated basis.
These are the same companies that are achieving higher gross profit margins.
These higher gross margin levels are achieved due to providing specialized
services, which typically result in increased operating expenses.
Depreciation and amortization expense increased 40.4% during the three months
ended June 30, 1999 compared to the corresponding period of 1998. 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 $2,750 due to increased borrowings during the
three months ended June 30, 1999 as compared to the corresponding period of
1998. The increased borrowings were generally due to funds used for acquisitions
in the third and fourth quarters of 1998 and the first quarter of 1999.
The effective income tax rate decreased to 39.5% from 40.6% for the three month
periods ended June 30, 1999 and 1998, respectively. The decreased rate is due to
the annualized effect of the tax free life insurance gain recorded during the
three months ended March 31, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $114,946, or 17.9%, compared to the first six
months of 1998, which reflects an increase of 54.3% in tons sold and a decrease
in the average sales price per ton of 24.4%. The increase in tons sold was
primarily due to the inclusion of the sales of the Acquisitions during the six
months ended June 30, 1999. During the 1999 period, sales to the aerospace
industry decreased from their 1998 levels, offsetting, in part, the increase
from the Acquisitions. The average selling prices decreased for the 1999 period
due mainly to lower costs of materials and the change in product mix from the
first six months of 1998. The change in product mix resulted due to the majority
of the Acquisitions selling primarily carbon steel products. As carbon steel
products generally have lower selling prices than non-ferrous products, selling
a higher percentage of carbon steel products causes the average selling price to
decline. In addition, sales of higher priced heat treated aluminum products to
the aerospace industry declined in the 1999 period in both volume and price from
the 1998 period. Excluding the Acquisitions, the Company reported an increase of
2.8% in tons sold, with the average selling price per ton decreasing 15.9%. The
decrease in average selling price was primarily due to lower costs of most of
the Company's products during the 1999 period, as compared to the 1998 period,
and due to the decrease in sales to the aerospace industry, discussed above.
The Company recorded a one-time net gain of $2,341 from a life insurance policy,
which is not taxable to the Company, in connection with the Company's
Supplemental Executive Retirement Plan ("SERP") during the six months ended June
30, 1999. The life insurance proceeds relate to the death of Steven S. Weis,
formerly the Senior Vice President and Chief Financial Officer of the Company,
in January 1999 and are net of the amount to be paid to his beneficiary under
the terms of the SERP.
9.
<PAGE> 12
Total gross profit increased $44,072, or 29.1%, in the first six months of 1999
compared to the first six months of 1998, primarily due to the inclusion of the
gross profit of the Acquisitions. As a percentage of sales, gross profit
increased to 25.9% in the 1999 year to date period, from 23.6% in the 1998
period. The gross profit margins improved primarily due to the Acquisitions
consisting of certain companies which operate at higher gross margin levels than
the gross margin level that has typically been attained by the Company on a
consolidated level. These companies are able to achieve higher gross profit
margins generally due to providing specific customer segments with specialized
services. In addition, gross profit margins excluding the Acquisitions have
generally improved, excluding sales to the aerospace market, due to lower costs
for most products sold by the Company during the 1999 period along with the
Company's efforts to manage margins and provide a high level of service.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $32,096, or 32.2%, in the first six months of 1999 compared to the
corresponding period of 1998 and amounted to 17.4% and 15.5% of sales,
respectively. The dollar increase in expenses reflects the increase in sales
volume for the 1999 period, which includes the sales and related expenses of the
Acquisitions. The increase as a percent of sales is primarily due to the
increased volume of products being sold at lower selling prices. In addition,
certain companies included in the Acquisitions operate at higher expense levels
than the Company has historically operated at on a consolidated basis. The
companies operating at these higher expense levels are also generating higher
gross margins due to their specialized services.
Depreciation and amortization expense increased 43.0% during the six months
ended June 30, 1999 compared to the corresponding period of 1998. 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 78.6% due to increased borrowings during the first
six months of 1999 as compared to the corresponding period of 1998. The
additional borrowings were used to fund the Acquisitions.
The effective income tax rate decreased to 39.5% for 1999, from 40.6% for the
six month period ended June 30, 1998. The decreased rate is due to the
annualized effect of the tax free life insurance gain recorded during the six
months ended June 30, 1999.
Earnings per diluted share of $1.49 for the six month period ended June 30, 1999
includes $.08 related to the tax free gain on the life insurance policy
discussed above.
LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN
SHARE AND PER SHARE AMOUNTS)
At June 30, 1999, working capital amounted to $285,699 compared to $291,170 at
December 31, 1998. The decrease, which includes the additional working capital
of companies acquired in 1999, was primarily due to a decrease in inventory of
$40,470 resulting from efforts by the Company to improve inventory turnover in
the first six months of 1999. 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 generally from internally
generated funds from operations and the Company's revolving line of credit.
Additionally, in October 1998, the Company entered into agreements with
insurance companies for private placements of senior unsecured notes in the
aggregate amount of $150,000, which was funded in November 1998. The proceeds of
the debt were used to refinance the borrowings under the Company's revolving
credit facility made to fund acquisitions during 1998, and borrowings for
general working capital purposes. The senior notes that were issued in the
private placement have maturity dates ranging from 2005 to 2010, with an average
life of 10.3 years, and bear interest at an average rate of 6.55% per annum.
In 1997, the Company entered into a syndicated unsecured revolving credit
facility with a borrowing limit of $200,000. In the same transaction, the
Company entered into an agreement that allows it to issue and have
10.
<PAGE> 13
outstanding letters of credit in an amount not to exceed $10,000. Also during
1997, private placements of debt for $65,000 and $75,000 were funded in
September 1997 and January 1997, respectively.
Cash provided by operations increased significantly during the six month period
ended June 30, 1999 as compared to the corresponding 1998 period, primarily due
to inventory reductions. Due to the Company's efforts to control inventory
costs, inventory levels have declined at most of the Company's locations during
the first six months of 1999 compared to 1998. In addition, during the 1998
period certain products were on allocation from the mills, causing higher levels
of such products to be carried in inventory during that time.
Net capital expenditures, excluding acquisitions, were $9,393 for the six months
ended June 30, 1999. The Company had no material commitments for capital
expenditures as of June 30, 1999. 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.
On August 31, 1998, the Board of Directors of the Company approved the purchase
of up to an additional 2,500,000 shares of the Company's outstanding Common
Stock through its Stock Repurchase Plan, for a total of 4,000,000 shares. No
shares were repurchased by the Company during the six months ended June 30,
1999. The Company has purchased a total of 1,781,550 shares of its Common Stock,
at an average purchase price of $14.86 per share, as of June 30, 1999, all of
which are being treated as authorized but unissued shares. The Company believes
such purchases enhance shareholder value and reflect its confidence in the
long-term growth potential of the Company.
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 by
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 its
results of operations or cash flows related to the Company's 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. As the Company's operations consist of metals service centers which do not
produce a date sensitive product or have highly automated operations, the
primary Year 2000 exposure is related to the business applications software used
by the Company to perform purchasing, inventory management, processing,
production scheduling, sales order entry and invoicing, routing and shipping,
and accounts payable and general ledger accounting. A majority of the Company's
locations began converting to new business applications software and related
hardware systems to obtain additional functionality in 1994. This conversion is
substantially complete. This software has since 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. The testing performed by the Company has confirmed the vendor's
certification. Additionally, certain of the subsidiaries acquired by the Company
will be converted to this system during 1999, as their current systems are not
considered to be Year 2000 compliant. At the Company's subsidiaries that are not
being converted to this system, assessments of the existing systems have
occurred, which indicated that certain subsidiaries required minor modifications
to their existing software. Most of the other subsidiaries have completed the
testing or modification phases. Any additional modifications or testing are
expected to be completed by August 1999.
11.
<PAGE> 14
With respect to other equipment used in the Company's operations, Year 2000
certifications are being obtained from vendors and testing is being performed,
where practical. As the Company utilizes minimal date dependent processing and
delivery equipment in its operations, management does not expect a material
impact on the Company's operations due to the failure of other equipment in the
Year 2000. 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 has estimated
costs related to the Year 2000 Issue of approximately $1.5 million, with
approximately $.75 million of these costs expected to be capitalized, as they
relate primarily to purchases of software. As such, the Company does not
anticipate a material impact on the results of operations or cash flows related
to the Year 2000 Issue. The Company has not obtained independent verification to
assure the reliability of the Year 2000 risk and cost estimates.
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 systems. 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. In addition, in the worst case scenario, if the
business applications software or other equipment fail due to Year 2000 issues,
other locations of the Company can fulfill the customer requirements for any
failed systems or equipment.
12.
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) 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 19, 1999.
(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. Douglas M. Hayes:
17,108,852 shares were voted for election and 100,328 shares were
withheld. Robert Henigson: 17,112,101 shares were voted for election
and 97,079 shares were withheld. Karl H. Loring: 17,146,601 shares
were voted for election and 62,579 shares were withheld. Leslie A.
Waite: 17,146,631 shares were voted for election and 62,549 shares
were withheld.
The Board of Directors selected Ernst & Young LLP as independent
auditors to audit the financial statements of the Company and its
subsidiaries for 1999, subject to ratification by the shareholders.
The selection was approved: 17,179,426 shares were voted for the
proposal, 22,711, shares were voted against it, and 7,043 shares
abstained.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on 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 11, 1999 By: /s/ David H. Hannah
------------------------------------------
David H. Hannah
President and Chief Executive Officer
By: /s/ Karla R. McDowell
------------------------------------------
Karla R. McDowell
Vice President and
Chief Financial Officer
14.
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