<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 September 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 October 31, 1999 27,787,226 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>
i
<PAGE> 3
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q may include forward-looking statements that involve risks and
uncertainties. Reliance Steel & Aluminum Co. ("the Company") is subject to risks
inherent in the industries which the Company serves, such as, the volatility of
the transportation, construction, general manufacturing, aerospace and
semiconductor fabrication industries to which the Company sells products. These
industries, and therefore the Company, are subject to changes in the economy in
general. The Company has increased its long-term debt as a result of its recent
acquisitions and is subject to increased risks as a result of this higher
leverage. The Company's metals service centers are subject to fluctuations in
the price of raw materials, although the Company is generally able to
pass-through increases in costs of raw materials to its customers. The Company's
relationship to and business dealings with significant vendors and customers and
the intense price competition in the Company's markets also may affect the
Company's results. Recent acquisitions of the Company may not perform as the
Company anticipates after the change in ownership. Accordingly, the actual
results realized by the Company could differ materially from the statements made
herein. You should not rely on the forward-looking statements made in this Form
10-Q.
ii
<PAGE> 4
PART I -- FINANCIAL INFORMATION
RELIANCE STEEL & ALUMINUM CO.
Consolidated Balance Sheets
(In thousands except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,790 $ 6,496
Accounts receivable, less allowance for doubtful accounts
of $6,686 at September 1999 and $5,816 at December 1998 179,346 156,150
Inventories 212,972 240,697
Prepaid expenses and other current assets 1,490 4,071
Deferred income taxes 13,911 12,899
--------- ---------
Total current assets 418,509 420,313
Property, plant and equipment, at cost:
Land 31,382 31,202
Buildings 131,646 125,051
Machinery and equipment 152,722 137,841
Allowances for depreciation (94,215) (81,013)
--------- ---------
221,535 213,081
Investment in 50%-owned company 19,528 24,942
Goodwill, net of accumulated amortization of $11,495 at September
1999 and $7,161 at December 1998 221,508 176,949
Other assets 11,681 6,110
--------- ---------
Total assets $ 892,761 $ 841,395
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,828 $ 91,615
Accrued expenses 26,885 17,768
Wages and related accruals 12,831 10,010
Deferred income taxes 9,650 9,650
Current maturities of long-term debt 150 100
--------- ---------
Total current liabilities 140,344 129,143
Long-term debt 343,050 343,250
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 - 27,787,226 at
September 1999 and 27,674,703 at December 1998,
stated capital 153,000 151,903
Retained earnings 233,167 193,899
--------- ---------
Total shareholders' equity 386,167 345,802
--------- ---------
Total liabilities and shareholders' equity $ 892,761 $ 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.
<PAGE> 5
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net sales $ 380,070 $ 357,819
Other income 1,095 747
----------- -----------
381,165 358,566
Costs and expenses:
Cost of sales 275,320 271,486
Warehouse, delivery, selling, administrative
and general 70,317 57,754
Depreciation and amortization 6,613 5,497
Interest 5,699 5,017
----------- -----------
357,949 339,754
Income before equity in earnings of 50%-owned
company and income taxes 23,216 18,812
Equity in earnings of 50%-owned company 1,173 1,423
----------- -----------
Income before income taxes 24,389 20,235
Income taxes:
Federal 8,268 7,082
State 1,366 1,215
----------- -----------
9,634 8,297
----------- -----------
Net income $ 14,755 $ 11,938
=========== ===========
Earnings per share - diluted $ .53 $ .42
=========== ===========
Weighted average shares outstanding - diluted 27,953,000 28,541,000
=========== ===========
Earnings per share - basic $ .53 $ .42
=========== ===========
Weighted average shares outstanding - basic 27,779,000 28,304,000
=========== ===========
Cash dividends per share $ .04 $ .04
=========== ===========
</TABLE>
2.
<PAGE> 6
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 1,136,668 $ 999,471
Gain from SERP benefit 2,341 --
Other income 2,912 2,555
----------- -----------
1,141,921 1,002,026
Costs and expenses:
Cost of sales 836,305 761,598
Warehouse, delivery, selling, administrative
and general 201,963 157,304
Depreciation and amortization 19,054 14,195
Interest 17,609 11,684
----------- -----------
1,074,931 944,781
Income before equity in earnings of 50%-owned
company and income taxes 66,990 57,245
Equity in earnings of 50%-owned company 3,208 4,114
----------- -----------
Income before income taxes 70,198 61,359
Income taxes:
Federal 23,797 21,476
State 3,931 3,682
----------- -----------
27,728 25,158
----------- -----------
Net income $ 42,470 $ 36,201
=========== ===========
Earnings per share - diluted $ 1.52 $ 1.27
=========== ===========
Per share gain from SERP benefit - diluted $ .05 $ .00
=========== ===========
Weighted average shares outstanding - diluted 27,879,000 28,547,000
=========== ===========
Earnings per share - basic $ 1.53 $ 1.28
=========== ===========
Weighted average shares outstanding - basic 27,733,000 28,289,000
=========== ===========
Cash dividends per share $ .13 $ .12
=========== ===========
</TABLE>
3.
<PAGE> 7
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 42,470 $ 36,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,054 14,195
Gain from SERP benefit (2,341) --
Deferred income taxes (13) 64
Loss (gain) on sales of machinery and equipment 113 (223)
Equity in earnings of 50%-owned company (3,208) (3,719)
Changes in operating assets and liabilities:
Accounts receivable (3,829) (3,467)
Inventories 51,743 (15,965)
Prepaid expenses and other assets (2,561) 679
Accounts payable and accrued expenses (238) (17,935)
--------- ---------
Net cash provided by operating activities 101,190 9,830
--------- ---------
INVESTMENT ACTIVITIES
Purchases of property, plant and equipment (15,389) (17,258)
Proceeds from sales of property and equipment 1,386 460
Acquisitions of metals service centers, net of cash acquired,
and asset purchases of metals service centers (85,370) (137,436)
Dividends received from 50%-owned company 8,622 500
--------- ---------
Net cash used in investing activities (90,751) (153,734)
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 70,500 193,000
Principal payments on long-term debt and short-term
borrowings (74,541) (75,733)
Dividends paid (3,605) (3,395)
Issuance of common stock 1,501 586
--------- ---------
Net cash (used in) provided by financing activities (6,145) 114,458
--------- ---------
Increase (decrease) in cash 4,294 (29,446)
Cash and cash equivalents at beginning of period 6,496 34,047
--------- ---------
Cash and cash equivalents at end of period $ 10,790 $ 4,601
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Interest paid during the period $ 12,465 $ 7,243
Income taxes paid during the period 29,568 23,168
</TABLE>
4.
<PAGE> 8
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited)
September 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 nine month periods ended September 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 September 3, 1999, the Company acquired 100% of the stock of Allegheny Steel
Distributors, Inc. ("Allegheny"), a privately-held metals service center.
Allegheny is based in Indianola (Pittsburgh), Pennsylvania and specializes in
cutting-to-length and blanking primarily carbon steel flat-rolled products.
Allegheny had sales of approximately $31,000,000 in the year ended December 31,
1998. Allegheny operates as a wholly-owned subsidiary of the Company. Allegheny
was acquired with funds from borrowings under the Company's syndicated credit
facility.
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 reported sales of
approximately $130,000,000 for the twelve months ended December 31, 1998. 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.
The Allegheny and LBI transactions have been accounted for under the purchase
method of accounting. Accordingly, the accompanying consolidated statements of
income include the revenues and expenses of Allegheny and LBI since their
respective closing dates. The financial statements reflect the preliminary
allocations of the purchase price. The allocations of purchase price were 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> 9
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 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 nine
months ended September 30, 1999.................... $ 50,000 $ 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 nine months ended
September 30, 1999................................. 3,200 3,350
-------- ---------
343,200 343,350
Less amounts due within one year................... (150) (100)
-------- ---------
$343,050 $ 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 incurred in connection with 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 one-time net 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> 10
5. SHAREHOLDERS' EQUITY
In August 1998, the Board of Directors approved the purchase of up to an
additional 3,750,000 shares of the Company's outstanding Common Stock through
its Stock Repurchase Plan, for a total of up to 6,000,000 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 September 30, 1999, the
Company had repurchased a total of 2,672,325 shares of its Common Stock under
the Stock Repurchase Plan, at an average cost of $9.91 per share. No shares were
repurchased by the Company during the nine month period ended September 30,
1999.
In March 1999, 10,836 shares of Common Stock were issued to division managers
and officers of the Company under the 1998 Key-Man Incentive Plan.
6. STOCK SPLIT
On July 28, 1999, the Board of Directors declared a 3:2 stock split in the form
of a 50% stock dividend on the Company's Common Stock, payable September 24,
1999 to shareholders of record September 2, 1999. All share and per share data,
as appropriate, reflect this split.
7. SUBSEQUENT EVENTS
On October 1, 1999, the Company purchased the assets and business of Arrow
Metals, a division of Arrow Smelters, Inc. The privately-held metals service
center business was based in Garland (Dallas), Texas, with additional facilities
in Houston and San Antonio. Arrow Metals specializes in non-ferrous metals
processing and distribution of mainly aluminum plate and bar products, with 1998
sales of approximately $22,000,000. The Arrow Metals locations are operating as
divisions of the Company.
7.
<PAGE> 11
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 nine month periods ended September 30, 1999 and September 30, 1998 (dollars
are shown in thousands and certain amounts may not calculate due to rounding):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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................. $380,070 100.0% $357,819 100.0% $1,136,668 100.0% $999,471 100.0%
GROSS PROFIT.............. 104,750 27.6 86,333 24.1 300,363 26.4 237,873 23.8
OPERATING EXPENSES........ 70,317 18.5 57,754 16.1 201,963 17.8 157,304 15.7
DEPRECIATION.............. 4,923 1.3 4,480 1.3 14,077 1.2 11,304 1.1
-------- ------ -------- ----- ---------- ----- -------- -----
INCOME FROM OPERATIONS.... $ 29,510 7.8% $ 24,099 6.7% $ 84,323 7.4% $ 69.625 $ 6.9%
======== ====== ======== ===== ========== ===== ======== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $22,251, or 6.2%, for the three months ended
September 30, 1999 compared to the same three months of 1998, which reflects an
increase of 25.0% in tons sold and a decrease in the average sales price per ton
of 14.4%. The increase in tons sold was primarily due to the inclusion of a full
three months of the sales of Lusk Metals, acquired September 18, 1998; and the
sales of 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; Liebovich Bros., Inc. ("LBI"),
acquired March 1, 1999; and Allegheny Steel Distributors, Inc. ("Allegheny"),
acquired September 1, 1999 (collectively, the "Acquisitions") during the three
month period ended September 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 from inclusion in 1999 of the
net sales of the Acquisitions, which, except for Lusk Metals, primarily sell
carbon steel products, which generally have lower prices than non-ferrous
products. In addition, the decline in sales to the aerospace industry
contributed to the decreased prices, as the products sold to this market
generally have higher selling prices than most other products sold by the
Company. Excluding the Acquisitions, the Company reported an increase of 1.9% in
tons sold, with the average selling price per ton decreasing 12.6%. 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. Both sales
volume and pricing to the aerospace industry have decreased in the 1999 period
as compared to the same period of 1998.
Total gross profit increased $18,417, or 21.3%, in the three months ended
September 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 24.1% in 1998 to 27.6% 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
the Company has historically achieved on a consolidated basis. Also lending to
the improvement were
8.
<PAGE> 12
increased margins at most of the Company's locations in the 1999 period as
compared to the 1998 period. This resulted mainly from lower costs of materials
for most of the Company's products coupled with the Company's efforts to
maintain selling prices.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $12,563, or 21.8%, in the three month period ended September 30, 1999
compared to the corresponding period of 1998 and amounted to 18.5% and 16.1% 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.
The effective income tax rate decreased to 39.5% from 40.6% for the three month
periods ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $137,197, or 13.7%, compared to the first nine
months of 1998, which reflects an increase of 42.7% in tons sold and a decrease
in the average sales price per ton of 20.7%. The increase in tons sold was
primarily due to the inclusion of the sales of the Acquisitions and a full nine
months of sales of Phoenix Corporation ("Phoenix Metals"), acquired January 30,
1998; Durrett Sheppard Steel Co., Inc. ("Durrett"), acquired January 30, 1998;
and Chatham Steel Corporation ("Chatham"), acquired July 1, 1998; during the
nine months ended September 30, 1999. The average selling prices decreased for
the 1999 period from the first nine months of 1998 due mainly to lower costs of
materials and changes in product mix. The changes in product mix resulted from
the majority of the Acquisitions along with Durrett and Chatham selling
primarily carbon steel products. Because 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 2.5% in tons
sold, which resulted from continued strong demand in most of the market areas
served by the Company, except for the aerospace market. The average selling
price per ton decreased 14.9% in the 1999 period as compared to the 1998 period.
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 nine months ended
September 30, 1999. The life insurance proceeds relate to the death of one of
the Company's executive officers in January 1999 and are net of the amount to be
paid to his beneficiary under the terms of the SERP.
Total gross profit increased $62,490, or 26.3%, in the first nine months of 1999
compared to the first nine months of 1998, primarily due to the inclusion of the
gross profit of the Acquisitions and a full nine months of Phoenix Metals,
Durrett and Chatham. As a percentage of sales, gross profit increased to 26.4%
in the 1999 year to date period, from 23.8% in the 1998 period. The gross profit
margins improved primarily due to most locations of the Company realizing
increased gross margin percentages in the 1999 period as compared to the 1998
period, and due to the Acquisitions. Certain companies acquired in 1999 and 1998
generally operate at higher gross margin levels than the gross margin level that
has typically been attained by the Company on a consolidated level. The gross
profit
9.
<PAGE> 13
margins excluding the Acquisitions have generally improved, except for 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 to its customers.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $44,659, or 28.4%, in the first nine months of 1999 compared to the
corresponding period of 1998. 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, along with a full nine months of expenses
for Phoenix Metals, Durrett and Chatham. As a percent of sales, G&A expenses
amounted to 17.8% and 15.7% of sales in the 1999 and 1998 periods, respectively.
This increase is primarily due to the increased volume of products being sold at
lower selling prices. In addition, certain companies acquired in 1999 and 1998
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.
Depreciation and amortization expense increased 34.2% during the nine months
ended September 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 $5,925 due to increased borrowings during the first
nine 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
nine month period ended September 30, 1998. The decreased rate is due to the
annualized effect of the tax free life insurance gain recorded during the nine
months ended September 30, 1999.
Earnings per diluted share of $1.52 for the nine month period ended September
30, 1999 includes $.05 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 September 30, 1999, working capital amounted to $278,165 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 of
$51,743 in inventory (excluding the effect of the acquired inventories in 1999
of LBI and Allegheny) resulting from efforts by the Company to improve inventory
turnover in the first nine 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.
Cash provided by operations increased significantly during the nine month period
ended September 30, 1999 as compared to the corresponding 1998 period, primarily
due to inventory reductions. Due to the Company's efforts to improve inventory
turns, inventory levels have declined at most of the Company's locations during
the first nine months of 1999 compared to 1998.
10.
<PAGE> 14
Net capital expenditures, excluding acquisitions, were $15,389 for the nine
months ended September 30, 1999. The Company had no material commitments for
capital expenditures as of September 30, 1999. The Company anticipates that
funds generated from operations and funds available under its $200,000 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 3,750,000 shares of the Company's outstanding Common
Stock through its Stock Repurchase Plan, for a total of 6,000,000 shares. No
shares were repurchased by the Company during the nine months ended September
30, 1999. The Company has purchased a total of 2,672,325 shares of its Common
Stock, at an average purchase price of $9.91 per share, as of September 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 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. All conversions,
except one, have been completed. The final conversion is on schedule to be
completed in November 1999. 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. These modifications have been completed.
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
11.
<PAGE> 15
purchases of software. Most of these costs have been incurred as of September
30, 1999. 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 conversion is
completed timely, or modified systems fail, 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> 16
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.
Not applicable
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> 17
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: November 12, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,790
<SECURITIES> 0
<RECEIVABLES> 186,032
<ALLOWANCES> (6,686)
<INVENTORY> 212,972
<CURRENT-ASSETS> 418,509
<PP&E> 315,750
<DEPRECIATION> (94,215)
<TOTAL-ASSETS> 892,761
<CURRENT-LIABILITIES> 140,344
<BONDS> 0
0
0
<COMMON> 153,000
<OTHER-SE> 233,167
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,136,668
<TOTAL-REVENUES> 1,141,921
<CGS> 836,305
<TOTAL-COSTS> 836,305
<OTHER-EXPENSES> 221,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,609
<INCOME-PRETAX> 70,198
<INCOME-TAX> 27,728
<INCOME-CONTINUING> 42,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,470
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.52
</TABLE>
