SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on February 28, 2003 was $488,818,876.65.
As of February 28, 2003, 31,752,087 shares of the registrant’s common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2003 (the “Proxy Statement”) are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
INDEX
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SAFE HARBOR STATEMENT UNDER THE PRIVATE
This Annual Report on Form 10-K and the documents incorporated in this Annual Report on Form 10-K by reference contain forward-looking statements. You should read carefully any statements containing the words “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar expressions or the negative of any of these terms.
Forward-looking statements involve known and unknown risks and uncertainties. Various factors, such as the “Risk Factors” listed below may cause our actual results, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Among the factors that could cause our results to differ are the following:
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future performance or results. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should consider these risks when reading any forward-looking statements.
This Annual Report on Form 10-K includes trademarks and service marks of the Company and its subsidiaries.
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PART I
Item 1. Business.
We are one of the five largest metals service center companies in the United States. Our network of 24 divisions, 18 operating subsidiaries and one 50.5%-owned company operates 99 processing and distribution facilities in 27 states, Belgium, France and South Korea. Through this network, we provide metals processing services and distribute a full line of more than 85,000 metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, stainless steel and specialty steel products, to more than 85,000 customers in a broad range of industries. Many of our metals service centers provide processing services for specialty metals only. We deliver products from facilities in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Montana, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Washington. One of our subsidiaries has two international locations, with a French subsidiary operating a distribution center in Fuveau, France and a 69.5% ownership interest in a joint venture company operating a manufacturing facility near Seoul, South Korea. Another subsidiary opened a metals service center in Gosselies, Belgium in January 2003 to service the European aerospace market.
Our primary business strategy is to enhance our operating results through strategic acquisitions and expansion of our existing operations. This strategy and our proven operating methods have enabled us to outperform most of our competitors in the metals service center industry. In 2002, we had net sales of $1.75 billion and net income of $30.2 million.
Industry Overview
Metals service centers acquire products from primary metals producers and then process carbon steel, aluminum, stainless steel and other metals to meet customer specifications, using techniques such as blanking, leveling (or cutting-to-length), sawing, shape cutting and shearing. These processing services save our customers time, labor, and expense and reduce their overall manufacturing costs. Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment, and inventory to process the metals for their own manufacturing operations. Accordingly, industry dynamics have created a niche in the market. Metals service centers purchase, process, and deliver metals to end-users in a more efficient and cost-effective manner than the end-user could achieve by dealing directly with the primary producer or with an intermediate steel processor. Industry analysts estimate that, historically in the United States, based on tonnage, metals service centers and processors annually purchase and distribute approximately:
These percentages have not changed significantly in the last five years. The metals distribution industry is currently estimated to generate more than $75 billion in revenues in the United States.
The metals service center industry is highly fragmented and intensely competitive within localized areas or regions. Many of our competitors operate single stand-alone service centers. According to industry sources, the number of intermediate steel processors and metals service center facilities in the United States has decreased from approximately 7,000 in 1980 to approximately 3,400 in 2002. This consolidation trend could create new opportunities for us to make acquisitions.
Metals service centers are generally less susceptible to market cycles than producers of the metals, because service centers are usually able to pass on all or a portion of price increases to their customers. In 2002, it was more difficult to pass through price increases of certain carbon steel products, as the increased
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Customers purchase from service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus of the capital goods and related industries on just-in-time inventory management and materials management outsourcing, and because integrated mills have reduced in-house direct sales efforts to small sporadic purchasers to enhance their production efficiency.
History of Reliance
Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939, and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten years, we had become a full-line distributor of steel and aluminum, operating a single metals service center in Los Angeles. In the early 1950’s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.
In the mid-1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel, brass, and copper, and equipped with automated materials handling and precision cutting equipment. We have continued to expand our network, with a focus on servicing our customers as opposed to merely distributing metal. We formed RSAC Management Corp., a California corporation, to operate as a holding company for our subsidiaries and to provide administrative and management services to our metals service centers. We operate metals service centers under the following trade names:
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We serve our customers primarily by providing quick delivery, metals processing and inventory management services. We purchase a variety of metals from primary producers and sell these products in
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Historically, we have expanded both through acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased more than thirty businesses. In 2002, we acquired certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., (now operating as Pacific Metal Company), the net assets and business of Central Plains Steel Co., and the stock of Olympic Metals, Inc. In addition, we began to consolidate the financial results of American Steel, L.L.C. (“American Steel”) because we increased our ownership interest to 50.5% and eliminated all super-majority veto rights. From 1984 to September 1994, we acquired twenty businesses.
On September 9, 2002, through a newly-formed company, we purchased certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., for approximately $30 million, after final approval of the U.S. Bankruptcy Court, through the Metals USA bankruptcy procedures. The business is now operating under its original name, Pacific Metal Company. Pacific Metal Company has locations in Portland, Eugene and Medford, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana; and Boise, Idaho and processes and distributes mainly aluminum and coated carbon steel products. Pacific Metal Company had net sales of approximately $22 million for the period September 9, 2002 to December 31, 2002.
On April 1, 2002, we purchased substantially all of the net assets and business of Central Plains Steel Co. through a newly-formed subsidiary that is now operating under the same name. Central Plains Steel Co. is a full-line carbon steel service center operating facilities in Kansas City and Wichita, Kansas, and had net sales of approximately $25 million for the nine-months ended December 31, 2002.
Also, on April 1, 2002, we acquired all of the outstanding stock of Olympic Metals, Inc., a metals service center in Denver, Colorado. Olympic Metals, Inc. specializes in the processing and distribution of aluminum, copper, brass and stainless steel products and had net sales of approximately $5 million for the nine months ended December 31, 2002. Effective December 31, 2002, we merged Olympic Metals, Inc. into the Company and it now operates as a division.
Effective May 1, 2002, we obtained one additional membership unit of American Steel giving us a 50.5% ownership interest. In addition, the Operating Agreement was amended to eliminate all super-majority and unanimous voting rights, among other changes. Due to these changes, we began consolidating American Steel’s financial results as of May 1, 2002. There was no cost involved in this transaction, which was completed to facilitate the renewal of American Steel’s credit facility. American Steel had net sales of approximately $38 million for the eight months ended December 31, 2002.
On July 2, 2001, we purchased the net assets of the steel service centers division of Pitt-Des Moines, Inc., through our newly-formed subsidiary, PDM Steel Service Centers, Inc., for approximately $93.2 million. PDM processes and distributes carbon steel products consisting primarily of structurals and plate for the capital goods and construction industries. PDM had seven metals service center facilities in Fresno, Santa Clara and Stockton (headquarters), California; Cedar Rapids, Iowa; Sparks, Nevada; Spanish Fork, Utah; and Woodlands, Washington, and had net sales of approximately $153 million for the year ended December 31, 2002. When we acquired these net assets, the Woodlands, Washington facility was operating as General Steel Corporation, a subsidiary of Pitt-Des Moines, Inc. We acquired the stock of General Steel Corporation on July 2, 2001, and merged General Steel into PDM on December 31, 2001. Effective April 1, 2002, the Cedar Rapids, Iowa facility became a division of our subsidiary Liebovich Bros., Inc. In February 2003, PDM opened a sales and distribution location in Las Vegas, Nevada.
Effective January 19, 2001, we acquired 100% of the outstanding stock of Aluminum and Stainless, Inc., that operates a metals service center based in Lafayette, Louisiana. Aluminum and Stainless provides non-ferrous products primarily related to the marine industry for use in the production of large commercial vessels
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Effective January 18, 2001, we purchased 100% of the stock of Viking Materials, Inc., based in Minneapolis, Minnesota, and a related company, Viking Materials of Illinois, Inc., based near Chicago, Illinois. These service centers provide primarily carbon steel flat-rolled products to their customers in the Midwest region of the United States. Viking Illinois operated as a subsidiary of Viking Materials from the acquisition date through the close of business on December 31, 2001, and now operates as a division of Viking Materials, which operates as a wholly-owned subsidiary of the Company. Viking Materials had net sales of approximately $74 million for the year ended December 31, 2002.
In January 2003, AMI Metals, Inc. opened a subsidiary, AMI Metals Europe, SPRL, in Gosselies, Belgium. This location distributes and processes heat-treated aluminum products primarily to the aerospace market. In December 2002, Phoenix Metals Company completed construction of a new facility near Nashville, Tennessee and relocated its existing Nashville service center to this facility from a leased building. This new facility provided increased capacity to support Phoenix’s business in the Nashville area.
In July 2002, we closed our Jacksonville, Florida facility that operated as part of our Chatham Steel Corporation subsidiary and combined the Jacksonville business with Chatham’s Orlando operation. In January 2002, we combined our Arrow Metals, San Antonio location that we acquired in late 1999 with our existing Reliance Metalcenter, San Antonio location. The specialty products sold by Arrow Metals are now sold and serviced through our Reliance Metalcenter location in the San Antonio market.
In early 2001, our Phoenix Metals Company, Tampa operation relocated to a newly-constructed facility in Tampa, Florida. The 82,000 square foot facility replaced a much smaller one, that was sold. The new facility has a more efficient layout and material flow and a new 72-inch wide leveling line.
Valex Corp., our 97%-owned subsidiary, is a leading domestic manufacturer of electropolished stainless steel tubing and fittings primarily used in the construction and maintenance of semiconductor manufacturing plants and in the biotech and pharmaceutical industries. Valex formed a joint venture in 1999 establishing a Korean company, Valex Korea Co., Ltd., and increased Valex Corp.’s ownership interest to 69.5% in February 2003, from 66.5%.
Our executive officers maintain financial controls and establish general policies and operating guidelines, while our division managers and subsidiary officers have virtual autonomy with respect to day-to-day operations. This balanced, yet entrepreneurial management style has enabled us to improve the productivity and profitability both of acquired businesses and of our own expanded operations. Successful division managers and other management personnel are awarded incentive compensation based in part on the profitability of their particular division or subsidiary and in part on our overall profitability.
We seek to increase our profitability by expanding our existing operations and acquiring businesses that diversify or enhance our customer base, product range and geographic coverage. We have developed an excellent reputation in the industry for our integrity and the quality and timeliness of our service to customers.
Customers
Our customers purchase from us and other metals service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. We believe that metals service centers have also enjoyed an increasing share of total metal shipments because of the focus of the capital goods and related industries on just-in-time inventory management and materials management outsourcing and because metal producers have reduced in-house direct sales efforts to small sporadic purchasers in order to enhance their production efficiency.
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We have more than 85,000 metals service center customers in various industries. In 2002, no single customer accounted for more than 1% of our sales and more than 80% of our orders were from repeat customers. Our customers are manufacturers and end users in the general manufacturing, construction (both commercial and residential), transportation (rail, truck and auto), aerospace and semiconductor fabrication industries. Our metals service centers wrote and delivered over 2,100,000 orders during 2002 at an average price of approximately $830. Most of our metals service center customers are located within a 150-mile radius of the metals service center serving them. The proximity of our centers to our customers helps us provide just-in-time delivery to our customers. With our fleet of approximately 675 trucks (some of which are leased) we are able to service many smaller customers. Moreover, our computerized order entry system and flexible production scheduling enable us to meet customer requirements for short lead times and just-in-time delivery. Less than 2% of our sales were to international customers in 2002, with approximately one-fourth of these sales from Valex’s international locations, serving the European and Asian markets.
We believe that our long-term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining these relationships.
Our customers’ demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in several industries, we believe that the effect of such changes on us is significantly reduced. However, in 2001 and 2002, we experienced lower sales levels due to a broad-based economic downturn that affected all industries. We experienced lower demand at all of our locations in 2001 as compared to 2000 and further declines in 2002 from 2001 levels. Aerospace was the exception, with strong demand through the first eight months of 2001, but then slowed post-September 11th. This resulted in significant declines in 2002 for our businesses that service the aerospace market. Metals pricing declined for most of our products in 2001 and remained at these low levels through 2002 except that we experienced increased pricing for certain of the carbon steel products that we sell during 2002, due to U. S. Government tariffs on imported steel and also due to reduced domestic production capacity, as discussed below.
California has been our largest market for many years, but we have been expanding our geographic coverage in recent years and the Southeast region of the United States was our largest market in 2002. California represented 27% of our 2002 sales, which was a significant decrease from 45% of our 1997 sales. The Southeast region of the United States represented 28% of our 2002 sales compared to 18% of our 1997 sales and the Midwest region, that we entered in 1999, represented 16% of our 2002 sales.
Suppliers
We purchase our inventory from the major metals mills, both domestic and foreign, and have multiple suppliers for all of our product lines. Our major suppliers of domestic carbon steel products include California Steel Industries, Inc., Chapparal Steel, Nucor Corporation and Steel Dynamics, Inc. Allegheny Technologies Incorporated, International Stainless Steel Co. and North American Stainless supply stainless steel products. We are a recognized distributor for various major aluminum companies, including Alcoa Inc., Alcan Aluminum Limited, Commonwealth Aluminum Corp., Kaiser Aluminum Corp., Ormet Aluminum Mill Products Corporation and Pechiney Rolled Products. During 2001, many domestic steel mills entered bankruptcy proceedings and certain of those mills temporarily closed a portion of their production capacity in 2002. Also in 2001, the Bush Administration enacted tariffs on certain metal products from specified countries under Section 201 of the Trade Act of 1974 to provide protection for the United States steel industry. The combination of reduced domestic production capacity and fewer imports resulted in significant price increases for carbon steel flat-rolled products during 2002. Because of our total volume of purchases and our long-term relationships with our suppliers, we believe that we were able to purchase inventory at the best prices offered by the suppliers, given the order size. We believe that we are not dependent on any one of our suppliers for metals and that our relationships with our suppliers are very strong. We have worked closely with our suppliers in order to become an important customer for each major supplier of metals for our core product lines.
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Backlog
Because of the just-in-time delivery policy and the short lead time nature of our business, we do not believe the information on backlog of orders is material to an understanding of our metals service center business.
Products and Processing Services
We provide a wide variety of processing services to each customer’s specifications and deliver products to manufacturers and other end users. We maintain a wide variety of products in inventory. For orders other than those requiring extensive or specialized processing, we often deliver to the customer within 24 hours after receiving the order. Our 2002 sales were comprised of the following approximate percentages, by product:
We do not depend on any particular customer group or industry because we process a variety of metals. Because of this diversity of product type and material, we believe that we are less exposed to fluctuations or other weaknesses in the financial or economic stability of particular customers or industries. We also are less dependent on particular suppliers.
For our largest product type (sheet and coil), we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between .015 and .25 inches thick, and rolled into 3 to 20 ton coils. The size and weight of these coils require specialized equipment to move and process the coils into smaller sizes and various products. Few of our customers have the capability of processing the metal into the desired products.
After receiving an order, we enter it into our computerized order entry system, select appropriate inventory and schedule the processing to meet the specified delivery date. About 40% of the orders specify delivery within 24 hours. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each purchased product to the fullest extent practicable.
Few metals service centers offer the full scope of processing services and metals that we provide. Our primary processing services are described below:
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We generally process specific metals to non-standard sizes only at the request of customers pursuant to purchase orders. We do not maintain an inventory of finished products, but we carry a wide range of metals to
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Marketing
Our more than 740 sales personnel are located in thirty-one states, Belgium, France and South Korea and provide marketing services throughout each of those locations. The sales personnel are organized by division or subsidiary among our profit centers and are divided into two groups. Those sales personnel who travel throughout a specified geographic territory maintain relationships with our existing customers and develop new customers; we consider them our outside sales personnel. Those who remain at the facilities to write and price orders are our inside sales personnel. The inside sales personnel generally receive incentive compensation, in addition to their base salary, based on the gross profit or pretax profit of their particular profit center. The outside sales personnel generally receive incentive compensation based on the gross profit from their particular geographic territories.
50.5%-Owned Company
Beginning July 1, 1995, we owned 50% and had operational control of American Steel, L.L.C., a limited liability company. Effective May 1, 2002, we increased our ownership interest to 50.5% and amended the Operating Agreement to eliminate all super-majority and unanimous voting rights, among other things. There was no cost involved in this transaction, which was completed to facilitate the renewal of American Steel’s credit agreement. American Steel operates metals service centers in Portland, Oregon and Kent, Washington. American Industries, Inc. owns the other 49.5% of American Steel. We are entitled to purchase the remaining 49.5% of American Steel during the ninety days following the earlier of the death of the owner of American Industries or April 1, 2006 and are required to purchase the remaining 49.5% of American Steel if American Industries so elects during the 90 days following the earlier of the death of the owner of American Industries or January 1, 2006. From July 1, 1995 through April 30, 2002, we accounted for our 50% investment in American Steel by the equity method, and included 50% of American Steel’s earnings in our net income and earnings per share amounts. Beginning May 1, 2002, we consolidate American Steel’s financial results and record American Industries 49.5% ownership as minority interest. American Metals, which operates three metals service centers located in the Central Valley of California, was a wholly-owned subsidiary of American Steel until October 1, 1998, when we acquired all of the stock of American Metals.
Industry and Market Cycles
We distribute metal products to our customers in a variety of industries, including manufacturing, construction, transportation, aerospace and semiconductor fabrication. Many of the industries our customers compete in are cyclical in nature and are subject to changes in demand based on general economic conditions. We sell to a wide variety of customers in diverse industries to reduce the effect of changes in these cyclical industries on our results. During the 2002 year, all of the industries that we sell to experienced lower demand levels due to the poor economic conditions. The United States economy began to experience a general slowing in the second half of 2000 that led to an economic recession in 2001 with a slight improvement early in 2002. Later in 2002, particularly near the year’s end, demand for our products weakened further. We were significantly impacted by the economic downturn in both 2001 and 2002. If the economic downturn worsens in 2003, the negative impact to our financial results may increase.
The semiconductor fabrication industry, aerospace industry and truck trailer and rail car industries have experienced cycles over the last few years that have affected our results. The semiconductor fabrication industry is highly cyclical in nature and is subject to changes in demand based on, among other things, general economic conditions and industry capacity. After a substantial period of growth from 1993 to 1996, this industry experienced a significant slowdown from mid-1996 through mid-1999. In the second half of 1999, the semiconductor industry began to improve and provided strong demand throughout 2000. In early 2001, there was a sudden and significant decline in demand from the semiconductor and related industries. This demand continued to decline throughout 2001 and remained at these low levels during 2002. We expect demand to remain at its current low levels through most of 2003, with some improvement expected late in 2003. The
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Fluctuations in the costs of our materials also affect the prices we can charge to our customers. By selling a diverse product mix, we are able to somewhat offset fluctuations in our costs of materials. However, during 2001, metals costs of most products reached their lowest levels experienced in over twenty years. This occurred due to overcapacity at the producer level in both domestic and foreign markets, along with the weak demand experienced in 2001. Due to the continued low demand in 2002, costs of most metals remained at or near the 2001 levels throughout 2002, with costs of metals sold to the aerospace industry declining further. However, costs of carbon steel flat-rolled products increased significantly in 2002 due to supply constraints, as certain producers reduced capacity and because of government restrictions on foreign imports. These increased costs began to decline slightly near the end of 2002 because of the continued low end-user demand; however, increases for many of these products have been announced in the first quarter of 2003. We have historically been able to pass the increases in metal costs on to our customers as costs typically increase due to strong demand. However, in 2002 carbon steel flat-rolled costs increased significantly, but demand for these products declined. Although we were able to pass on most of these cost increases to our customers, we did experience some margin pressure, especially late in 2002 due to the lower demand levels of our customers. This caused some of our competitors to dump their product into the market at low prices. This has continued into the early part of 2003, but we expect the announced price increases to stabilize the dumping. We cannot guarantee that the spread between our metal costs and selling prices will continue at the levels experienced during 2002 especially if demand does not improve. Increased metals costs and related selling prices should, however, allow us to record increased revenue and gross margin dollars on a consistent volume basis.
Competition
The metals distribution industry is highly fragmented and competitive. We have numerous competitors in each of our product lines and geographic locations, although competition is most frequently local or regional. Although most of our competitors are smaller than we are, we face strong competition from national, regional and local independent metals distributors, subsidiaries of metal producers and the producers themselves, some of which have greater resources than us. Based on an industry report, it is estimated that there were approximately 3,400 intermediate steel processors and metals service center facilities in the United States in 2002. We are one of the five largest service center companies in the United States. Competition is based on price, service, quality and availability of products. We maintain centralized relationships with our suppliers and a decentralized operational structure. We believe that this division of responsibility has increased our ability to obtain competitive prices of metals and to provide more responsive service to our customers. In addition, we believe that the size of our inventory, the different metals and products we have available and the wide variety of processing services we provide distinguish us from our competition. We believe that we increased our market share during 2002 due to our strong financial condition, as many of our competitors were facing capital constraints.
Quality Control
Procuring high quality metal from suppliers on a consistent basis is critical to our business. We have instituted strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. We perform physical and chemical analyses on selected raw materials to verify that their mechanical and dimensional properties,
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We established a program to obtain certification for most of our divisions and certain of our subsidiaries under the ISO 9002 internationally-accepted quality standard. We have obtained ISO 9002 certification at certain of our locations. We believe that such certification is beneficial for our business and operations and that this certification provides us with access to additional customers. We plan to re-certify these locations under the new ISO standards in 2003. We may obtain this certification for additional locations.
Systems
We have converted our Reliance divisions and certain of our subsidiaries from various software programs to the StelplanTM manufacturing and distribution information system. StelplanTM is a registered trademark of Invera, Inc. StelplanTM is an integrated business application system with functions ranging from order entry to the generation of financial statements. StelplanTM was developed specifically for the metals service center and processor industry. StelplanTMalso provides information in real time, such as inventory availability, location and cost. With this information, our marketing and sales personnel can respond to the customer’s needs more efficiently and more effectively and quickly provide a product price.
Certain of our subsidiaries use other vendor packages or in-house developed systems to support their operations. The basic functionality of the software is similar to StelplanTM. A common financial reporting system is used company-wide.
Government Regulation
Our metals service centers are subject to many federal, state and local requirements to protect the environment, including hazardous waste disposal and underground storage tank regulations. The only hazardous wastes that we use in our operations are lubricants and cleaning solvents. We frequently examine ways to minimize any impact on the environment and to effect cost savings relating to environmental compliance. We pay state certified private companies to haul and dispose of our hazardous waste.
Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Health and Safety Act and related regulations, which, among other requirements, establish noise, dust and safety standards. We have a very strict safety policy, which we believe is one of the best in the industry. We are in material compliance with applicable laws and regulations and do not anticipate that future compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition.
Environmental
We have no material outstanding unresolved issues with environmental regulators, and our products and processes present no environmental concerns. We do not expect any material expenditures to meet environmental requirements. Some of the properties we own or lease are located in industrial areas, however, with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. Any such liabilities would arise from causes other than our operations, but we do not expect that these liabilities would have a material adverse impact on our results of operations, financial condition or liquidity.
Employees
As of March 1, 2003, we had approximately 4,500 employees. We reduced our employee count by over 650 employees, or 13%, in 2001 and by an additional 270 employees, or 5.8%, in 2002 in response to the poor economic conditions. Approximately 765 employees are covered by collective bargaining agreements, which expire at various times over the next four years. We have entered into collective bargaining agreements with twenty-three union locals at twenty-two of our locations. These collective bargaining agreements have not had
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Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“the Exchange Act”). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC athttp://www.sec.gov.
The Company also makes available free of charge on or through its Internet website (http://www.rsac.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to, the SEC.
Item 2. Properties.
We maintain 99 metals service center processing and distribution facilities in 27 states, Belgium, France and South Korea, plus our corporate headquarters. All of our service center facilities are in good or excellent condition and are adequate for our existing operations. These facilities generally operate at about 60% of capacity based upon a 24-hour seven day week, with each location averaging slightly less than two shifts operating at full capacity for a five-day work week. Thirty-nine of these facilities are leased. In addition, we lease our corporate headquarters in Los Angeles, California. Siskin leases a portion of its facilities in Chattanooga, Tennessee, and Liebovich leases a portion of its facilities in Rockford, Illinois. AMI Metals leases its corporate office space in Brentwood, Tennessee. The lease terms expire at various times through 2013 and the aggregate monthly rent is approximately $820,000. We own all other properties. In December 2002, we completed the sale of the land and buildings that were our previous corporate offices, resulting in a net gain of approximately $870,000. Our Jacksonville, Florida facility is for sale, because we closed its operation in mid-2002. We constructed a new facility near Nashville, Tennessee for Phoenix Metals Company in 2002 and in Gosselies, Belgium for AMI Metals in 2002. The following table sets forth certain information with respect to each facility:
Facilities and Plant Size
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Item 3. Legal Proceedings.
From time to time, we are named as a defendant in legal actions. Generally, these actions arise out of our normal course of business. We are not a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse effect on our results of operations or financial condition. We maintain liability insurance against risks arising out of our normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year.
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PART II
Our common stock is listed on The New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994. The following table sets forth the high and low reported closing sale prices of the common stock on the NYSE Composite Tape for the stated calendar quarters.
As of March 19, 2003, there were 293 record holders of the common stock.
We have paid quarterly cash dividends on our common stock for 43 years. The Board of Directors may reconsider or revise this policy from time to time based on conditions then existing, including our earnings, financial condition, and capital requirements, or other factors the Board may deem relevant. We expect to continue to declare and pay dividends in the future, if earnings are available to pay dividends, but we also intend to continue to retain a portion of earnings for reinvestment in our operations and the expansion of our business. We cannot assure you that either cash or stock dividends will be paid in the future, or that, if paid, the dividends will be at the same amount or frequency as paid in the past.
The private placement debt agreements for our unsecured senior notes and our syndicated credit facility contain covenants which, among other things, require us to maintain a minimum net worth and limits cash dividends based upon our earnings, which may restrict our ability to pay dividends. Since our initial public offering in September 1994 through 2002, we have paid between 6% and 25% of earnings to our shareholders as dividends. In 2002, our dividend payments represented 25% of our earnings due to the low earnings in 2002 as a result of the poor economic conditions.
The following table sets forth certain information with respect to our cash dividends declared during the past two fiscal years:
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Item 6. Selected Financial Data.
We have derived the following selected summary financial and operating data for the years ended December 31, 1998 through 2002 from our audited consolidated financial statements. You should read the information below with our Consolidated Financial Statements, including the notes related thereto, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
SELECTED CONSOLIDATED FINANCIAL DATA
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
Overview
During 2002, the metals service center industry continued to experience low levels of customer demand, primarily related to the economic recession in the United States. Demand for our products began to slow in the second half of 2000, but only in certain geographic areas. In early 2001, we felt a sudden slowdown in demand for the semiconductor and related markets, and demand continued to decline throughout 2001 for all of our product end markets except aerospace. Aerospace demand and pricing were strong in 2001, but fell off significantly after September 11th. The low demand levels in all areas continued throughout 2002.
Metals pricing in 2002 remained at the historically low levels reached in 2001, with the exception of carbon steel flat-rolled products. Although end market demand was low, domestic carbon steel flat-rolled costs increased significantly in the second half of 2002 due to supply constraints resulting from tariffs on imported material and domestic capacity shutdowns. There were significant competitive pressures in late 2002 that did not allow us to fully pass through these price increases and caused our gross margins to decline.
Our performance was significantly impacted by these factors; however, we are proud of our profitable returns and our ability to manage our working capital and to generate cash flow to expand and strengthen our business and reduce debt during this challenging environment. We also completed three acquisitions during 2002 and began to consolidate the financial results of American Steel, L.L.C., our joint venture company, due to an increase in our ownership.
We believe that we are positioned to take full advantage of improved economic conditions, while at the same time we are poised to continue to operate efficiently in the less favorable economies such as that experienced during 2002 because of our focus on cost controls, inventory turnover, and product and geographic diversification. We do not anticipate any significant improvements in either demand or pricing for our products in 2003 and we expect the competitive factors experienced in late 2002 to continue to pressure our gross margins into at least the early part of 2003.
Recent Developments
We completed three acquisitions and had a change in the ownership structure of a joint venture company in 2002. Through these transactions, we entered into new geographic markets in Idaho and Montana, strengthened our presence in the Midwest and Pacific Northwest markets of the United States and expanded our product offerings. The acquisitions made in 2002 did not result in new segments.
On September 9, 2002, through a newly-formed company, we purchased certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., for approximately $30 million, after final approval of the U.S. Bankruptcy Court, through the Metals USA bankruptcy procedures. This business is now operating under its original name, Pacific Metal Company, with locations in Portland, Eugene and Medford, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana; and Boise, Idaho. Pacific Metal Company processes and distributes mainly aluminum and coated carbon steel products and had net sales of approximately $22 million for the period September 9, 2002 through December 31, 2002.
On April 1, 2002, we purchased substantially all of the net assets and business of Central Plains Steel Co. through a newly-formed subsidiary that is now operating under the same name. Central Plains Steel Co., a full-line carbon steel service center with facilities in Kansas City and Wichita, Kansas, had net sales of approximately $25 million for the nine months ended December 31, 2002.
Also on April 1, 2002, we acquired all of the outstanding stock of Olympic Metals, Inc., a metals service center in Denver, Colorado. Olympic Metals, Inc. specializes in the processing and distribution of aluminum, red metals and stainless steel products and had net sales of approximately $5 million for the nine months ended December 31, 2002. We merged Olympic Metals, Inc. into Reliance effective December 31, 2002.
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Effective May 1, 2002, we obtained one additional membership unit of American Steel, L.L.C. (“American Steel”) giving us a 50.5% ownership interest. The Operating Agreement was amended to eliminate all super-majority and unanimous voting rights, among other changes. Due to this change in ownership structure, we began consolidating American Steel’s financial results as of May 1, 2002. There was no cost involved in this transaction, which was completed to facilitate the renewal of December 31, 2002. American Steel had net sales of approximately $38 million for the eight months ended December 31, 2002.
For discussion purposes, all references to the Company’s 2002 acquisitions include the consolidation of American Steel as of May 1, 2002.
Results of Operations
The following table sets forth certain income statement data for each of the three years in the period ended December 31, 2002 (dollars are shown in thousands and certain amounts may not calculate due to rounding):
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales. Our 2002 consolidated net sales were $1.75 billion, an increase of 5.3%, compared to $1.66 billion in 2001. This includes an increase in tons sold of 10.3% and a decrease in the average selling price per ton of 4.5%. The increase in our tons sold is mainly due to the sales from the companies we acquired in 2002. We continued to experience reduced customer demand in all markets during 2002. This resulted in reduced volumes at most of our locations, but especially those primarily servicing the aerospace industry, with 2002 sales to the aerospace industry decreasing 25.4%, with a 19.4% decrease in tons sold and a 7.5% decrease in the average selling price per ton. Our 2002 sales to the aerospace market represented approximately 11.6% of total sales.
The decrease in our average selling price per ton of 4.5% resulted mainly from shifts in product mix due to both acquisitions and reductions in our sales of higher priced products to the semiconductor, electronics and aerospace markets. Although metals costs had decreased significantly for most of our products during 2001, we experienced further declines in 2002 with the exception of carbon steel flat-rolled products. In the second half of 2002, costs of carbon steel flat-rolled products increased significantly due to supply constraints resulting from the temporary closure of a few mills and due to tariffs placed on imports. Carbon steel flat-rolled products represented approximately 20.0% of our 2002 sales.
Our same-store sales (excludes sales of businesses we acquired in 2002 and 2001) decreased $90.4 million, or 6.1%, with year 2002 tons sold declining 4.1% as compared to 2001, and the average selling price per ton decreasing by 2.0%. These decreases were due to the poor economic conditions in 2002 and shifts in our product mix with significant declines in same-store sales to the semiconductor and aerospace industries impacting both the tons sold and the average selling price.
Gross Profit. Our total gross profit of $476.8 million increased 3.1% from 2001 due to our 2002 acquisitions. Our gross profit as a percentage of sales was 27.3% in 2002 compared to 27.9% in 2001. The decline in our gross margin percentage occurred primarily due to competitive pressures resulting from the low level of customer demand throughout the year, especially in the fourth quarter and due to LIFO expense of
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Expenses. Warehouse, delivery, selling, general and administrative expenses (“S,G&A expenses”) for 2002 increased $32.0 million, or 9.2%, from 2001. This increase includes the S,G&A expenses of the companies we acquired in 2002 plus a full year of expenses of our 2001 acquisitions. These expenses represented 21.7% and 21.0% of sales in 2002 and 2001, respectively. We were able to reduce our same-store S,G&A expenses by 2.3% in 2002 as compared to 2001. The majority of the decrease in same-store S,G&A expenses relates to headcount reductions, as personnel costs are the most significant component of our variable costs. For the 2002 year, we reduced our work force by 5.8%, with half of the reductions, or approximately 130 employees, occurring in the fourth quarter in response to declines in demand. This reduction was in addition to the 13% reduction that occurred in 2001.
Depreciation and amortization expense decreased $3.8 million for 2002 compared to 2001, mainly because of the change in accounting rules for goodwill. In 2001, we had $7.1 million of goodwill amortization expense that was not recorded in 2002, in accordance with the new rules. This was offset by the inclusion of depreciation expense related to the companies we acquired in 2002 and 2001, along with depreciation expense on current year capital expenditures. The new accounting rules adopted in 2002 also require us to measure our goodwill annually for impairment of value. We did not experience any goodwill impairment in 2002, and therefore did not record any impairment charges.
Operating Income.Income from operations, calculated as gross profit less S,G&A expenses and depreciation expense, decreased as a percentage of sales to 4.0% in 2002 compared to 5.5% in 2001. Although consolidated sales increased, our gross profit margin declined and our operating expenses increased due to a larger network of service centers, as discussed above.
Interest expense decreased by 15.5% to $22.6 million in 2002 compared to 2001, due to lower borrowing levels and lower interest rates. We used the July 2001 equity offering proceeds of approximately $150 million to pay down debt. The 2002 year included borrowings for our acquisitions of Central Plains Steel Co. and Pacific Metal Company which were paid off with cash from operations and included $19.7 million of debt upon consolidation of American Steel.
Equity Earnings and Minority Interest.Because of our increased ownership interest in American Steel, we began to consolidate their results beginning May 1, 2002. Prior to that date, we accounted for our investment using the equity method. On our income statement, the 2002 equity in earnings of 50%-owned company represents our 50% of American Steel’s net income from January 1 through April 30th. The minority interest amount represents 49.5% of American Steel’s net income beginning May 1, 2002 for the portion that we do not own. Our consolidated balance sheet at December 31, 2002 includes the assets and liabilities of American Steel, including $24.5 million of goodwill, $21.4 million of debt and a reclassification from investment in 50%-owned company to minority interest.
Income Tax Rate. Our effective income tax rate decreased from 39.6% in 2001 to 39.3% in 2002, mainly due to shifts in the geographic composition of our 2002 income, resulting from both acquisitions and current economic conditions.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales. Our 2001 consolidated net sales were $1.66 billion, a decrease of 4.0%, compared to $1.73 billion in 2000. This includes an increase in tons sold of 6.3% and a decrease in the average selling price per ton of 9.5%. The increase in our tons sold is due to the sales from the companies we acquired in 2001. Overall customer demand declined due to the poor business environment in the United States during 2001. This resulted in reduced volumes at all of our locations except for those primarily serving the aerospace
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The decrease in our average selling price per ton of 9.5% resulted from lower metals costs and from a shift in our product mix. During 2001, costs for most metals we sell continued to decline from the year 2000 levels. However, costs of the heat-treated aluminum and specialty metals we sell to the aerospace industry increased somewhat in early 2001, but then declined in the fourth quarter of 2001. Our average selling price was also impacted by shifts in product mix, as the products sold to the aerospace industry are higher priced than most other products we sell, which had a favorable impact on our average selling price. However, the reduced sales of the even higher priced products we sell to the semiconductor and related industries more than offset this favorable increase. In addition, the companies we acquired in 2001 sell mostly carbon steel products, which generally have lower prices than most other products we sell.
Our 2001 same-store sales (excludes sales of businesses we acquired in 2001 and 2000) decreased $267.1 million, or 15.8%, with year 2001 tons sold declining 10.5% as compared to 2000, and the average selling price per ton decreasing by 6.0%. These decreases were due to the poor economic conditions in 2001 and shifts in our product mix with significant declines in 2001 same-store sales to the semiconductor and related industries impacting both the tons sold and the average selling price.
Gross Profit. Our total gross profit of $462.5 million decreased only 1.5% in 2001 from 2000, on a 4.0% decrease in sales. This was due to our ability to increase our gross margins as a percentage of sales to 27.9% in 2001 compared to 27.2% in 2000. We believe our focus on inventory turnover allowed us to reduce our selling prices at a slightly slower pace than our metals costs during 2001, resulting in an improvement in our gross margin percentage in 2001. Cost of sales was reduced by LIFO income of $11.7 million in 2001, resulting from the decrease in metals costs noted above and a decrease in inventory quantities, compared to increased costs of sales in 2000 (LIFO expense) of $4.7 million due to increased metals costs.
Expenses. S,G&A expenses for 2001 increased $28.7 million, or 9.0%, from 2000, because of the S,G&A expenses of the companies we acquired in 2001. These expenses represented 21.0% and 18.5% of sales in 2001 and 2000, respectively. The increase in our S,G&A expenses as a percentage of sales resulted from both lower metals prices and lower selling volumes experienced in 2001. We were able to reduce our 2001 same-store S,G&A expenses by $7.3 million in 2001 as compared to 2000. The majority of the decrease in 2001 same-store S,G&A expenses relates to headcount reductions, as personnel costs are the most significant component of our variable costs. For the 2001 year, we reduced our work force by over 650 employees, or 13%, with reductions from time to time during the year in response to declining demand.
Depreciation and amortization expense increased $4.2 million for 2001 compared to 2000, due to the inclusion of both the depreciation expense and the amortization of goodwill related to the companies we acquired in 2001 and 2000, along with depreciation expense on current year capital expenditures.
Operating Income.Income from operations decreased as a percentage of sales to 5.5% in 2001 compared to 7.5% in 2000. This decline resulted from the decrease in gross profit and the increases in expenses discussed above.
Interest expense increased by 2.6% to $26.7 million in 2001 compared to 2000, due to an increase in the average debt outstanding early in 2001 to fund the $43.9 million stock repurchase in the fourth quarter of 2000 and to fund the January 2001 acquisitions of Aluminum and Stainless, Inc. and Viking Materials, Inc. and its related company, Viking Materials of Illinois, Inc. However, we were able to significantly reduce our debt level and fund the acquisition of the assets and business contributed to our subsidiary PDM Steel Service Centers, Inc. with the $149.8 million of net proceeds from our July 2001 equity offering. The interest rate reductions during 2001 also lowered our 2001 interest expense.
Equity Earnings.Equity earnings from our 50%-owned company decreased by $2.0 million, or 87.6%, in 2001 as compared to 2000. A weakness in demand in the Pacific Northwest, related mainly to the truck trailer and rail car markets, began in the second half of 2000 and continued throughout 2001.
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Income Tax Rate. Our effective income tax rate increased from 39.2% in 2000 to 39.6% in 2001, mainly due to shifts in the geographic composition of our 2001 income, resulting from both acquisitions and current business conditions.
Liquidity and Capital Resources
At December 31, 2002, working capital was $389.6 million, compared to $380.0 million at December 31, 2001. The increase was primarily due to the additional working capital from our 2002 acquisitions, and is net of decreases in our inventory level due to the decline in sales volumes we experienced throughout 2002 and our ability to effectively manage our inventories. We focus on our days sales outstanding to monitor accounts receivable and on our inventory turnover rate to monitor our inventory levels, as receivables and inventory are our two most significant elements of working capital. At December 31, 2002, our accounts receivable days sales outstanding were 44 days, improved from 45 days at December 31, 2001. (We calculate our days sales outstanding as an average of the most recent two-month period.) Our inventory turnover rate was about 4.25 times in 2002, improved from about 4.0 times in 2001 and better than the industry average in the current business environment.
Our primary sources of liquidity are generally from our internally generated funds from operations and our revolving line of credit. In 2001, we also raised $149.8 million in a secondary equity offering. Our operations provided cash of $90.7 million in 2002, compared to $103.6 million in 2001. Along with our earnings, the reductions in our inventory levels in reaction to our reduced sales levels was the primary factor in providing cash flow from operations. The cash generated from operations in 2002 was used to fund the $53.3 million for the purchase of our 2002 acquisitions and to pay down debt of $17.6 million. We reduced our net debt-to-total capital ratio to 35.5% at December 31, 2002, from 36.3% at December 31, 2001.
Our syndicated credit facility allows for $335 million in borrowings. As of December 31, 2002, $38 million was outstanding under this credit facility. The $335 million five-year unsecured syndicated credit facility, as amended effective December 31, 2002, is with nine banks and may be increased to $400 million. At December 31, 2002, we had $10.9 million of letters of credit outstanding under our syndicated credit facility. American Steel has a two-year syndicated credit agreement, as amended effective June 30, 2002, that is secured with working capital with a borrowing limit of $24 million. As of December 31, 2002, $21.4 million was outstanding on American Steel’s credit facility.
We also have senior unsecured notes outstanding in the aggregate amount of $280 million. The senior notes have maturity dates ranging from 2004 to 2010, with an average remaining life of 4.8 years, and bear interest at a weighted average fixed rate of 6.83% per annum. The syndicated credit facility and senior note agreements require that we maintain a minimum net worth and interest coverage ratio, and a maximum leverage ratio, and include restrictions on the amount of cash dividends we pay.
Our net capital expenditures, excluding acquisitions, were $18.7 million for the 2002 year. We had no material commitments for capital expenditures or capital leases as of December 31, 2002. Our operating lease commitments are discussed in Note 11 of the Notes to Consolidated Financial Statements. The purchases of Central Plains Steel Co. and Pacific Metal Company were funded with borrowings on our line of credit. The acquisition of Olympic Metals, Inc. was funded by cash from operations. Our capital requirements are primarily for working capital, acquisitions, and capital expenditures for continued improvements in plant capacities and materials handling and processing equipment.
On July 5, 2001, we issued 6,325,000 shares of our common stock, including the shares issued on exercise of the over-allotment option, at a price of $25.00 per share for total net proceeds of approximately $149.8 million, after deducting the underwriting discount and offering expenses. The proceeds were used to reduce debt related to the PDM Steel Service Centers, Inc. acquisition and debt related to other acquisitions, capital expenditures, and general working capital needs. We anticipate that funds generated from operations and funds available under our line of credit will be sufficient to meet our working capital needs for the foreseeable future.
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On August 31, 1998, our Board of Directors approved the purchase of up to an additional 3,750,000 shares of our outstanding common stock through our Stock Repurchase Plan, for a total of 6,000,000 shares. Since inception of the Stock Repurchase Plan, we have purchased a total of 5,538,275 shares of our common stock, at an average purchase price of $14.94 per share, as of December 31, 2002, all of which are being treated as authorized but unissued shares. In 2002 and 2001, we did not repurchase any shares of our common stock. We believe such purchases, given appropriate circumstances, enhance shareholder value and reflect our confidence in the long-term growth potential of our Company.
Inflation
Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices.
Seasonality
Some of our customers may be in seasonal businesses, especially customers in the construction industry. As a result of our geographic, product and customer diversity, however, our operations have not shown any material seasonal trends. Revenues in the months of November and December traditionally have been lower than in other months because of a reduced number of working days for shipments of our products and holiday closures of some of our customers. In 2002, many customers extended their holiday closures which we believe was due to both the poor business conditions and the holidays occurring mid-week. We cannot assure you that period-to-period fluctuations will not occur in the future. Results of any one or more quarters are therefore not necessarily indicative of annual results.
Goodwill
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $284.3 million at December 31, 2002, or approximately 25.0% of total assets or 46.6% of consolidated shareholders’ equity. The amortization of goodwill in the 2001 year was $7.1 million, or approximately 11.8% of pretax income. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS” or “Statement”) No. 142,Goodwill and Other Intangible Assets. Under the new rule, goodwill deemed to have indefinite lives is no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their useful lives. We have adopted the provisions of SFAS No. 142 effective January 1, 2002. We review the recoverability of goodwill annually or whenever significant events or changes occur which might impair the recovery of recorded costs. We measure possible impairment based on either significant losses of an entity or the ability to recover the balance of the long-lived asset from expected future operating cash flows on an undiscounted basis. If impairment is identified, we would calculate the amount of such impairment based upon the discounted cash flows or the market values as compared to the recorded costs. We have performed impairment tests of goodwill as of January 1, 2002 and November 1, 2002 and believe that the recorded amounts for goodwill are recoverable and that no impairment currently exists.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, goodwill and intangible assets, long-lived assets and revenue recognition. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily
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We believe the following critical accounting policies, as discussed with the Audit Committee, affect our more significant judgments and estimates used in preparing our consolidated financial statements. (See Note 1 of the Notes to Consolidated Financial Statements for our Summary of Significant Accounting Policies.) There have been no material changes made to the critical accounting policies during the periods presented in the Consolidated Financial Statements.
Accounts Receivable
Inventories
Deferred Tax Assets
Goodwill and Intangible Assets
Long-Lived Assets
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Revenue Recognition
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of business, we are exposed to various market risk factors, including changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates, and metals pricing and availability. Additionally, we are exposed to market risk primarily related to our fixed rate long-term debt. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. Decreases in interest rates may affect the market value of our fixed rate debt. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Based on our debt, we do not consider the exposure to interest rate risk to be material. Our fixed rate debt obligations are not callable until maturity.
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Item 8. Financial Statements and Supplementary Data.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other schedules are omitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.
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REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
We have audited the accompanying consolidated balance sheets of Reliance Steel & Aluminum Co. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reliance Steel & Aluminum Co. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
Long Beach, California
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CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Reliance Steel & Aluminum Co. and its wholly-owned subsidiaries, which include Allegheny Steel Distributors, Inc., Aluminum and Stainless, Inc., American Metals Corporation, American Steel, L.L.C. (50.5%-owned), AMI Metals, Inc., CCC Steel, Inc., Central Plains Steel Co., Chatham Steel Corporation, Durrett Sheppard Steel Co., Inc., Liebovich Bros., Inc., Lusk Metals, Olympic Metals, Inc., Pacific Metal Company, PDM Steel Service Centers, Inc., Phoenix Corporation, RSAC Management Corp., Service Steel Aerospace Corp., Siskin Steel & Supply Company, Inc., Toma Metals, Inc., Valex Corp. (97%-owned) and Viking Materials, Inc., on a consolidated basis (“Reliance” or “the Company”). All subsidiaries of Reliance are held by RSAC Management Corp. All significant intercompany transactions have been eliminated in consolidation. Through April 30, 2002, the Company accounted for its 50% investment in American Steel, L.L.C. on the equity method of accounting, however, since May 1, 2002, the Company has consolidated the financial results of American Steel, L.L.C. The Company accounts for its 66.5% interest in Valex Korea Co., Ltd. on a consolidated basis, reporting the remaining 33.5% as minority interest.
In 2002, the Company operated a metals service center network of 97 processing and distribution facilities (including American Steel, L.L.C.) in 27 states, France and South Korea which provided value-added metals processing services and distributed a full line of more than 85,000 metal products.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and trade receivables. The Company maintains cash and cash equivalents with high-credit, quality financial institutions. The Company, by policy, limits the amount of credit exposure to any one financial institution. At times, cash balances held at financial institutions were in excess of federally insured limits. Concentrations of credit risk with respect to trade receivables are limited due to the geographically diverse customer base and various industries into which the Company’s products are sold. Credit is generally extended based upon an evaluation of each customer’s financial condition, with terms consistent in the industry and no collateral required. Losses from credit sales are provided for in the financial statements and consistently have been within the allowance provided. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible. As a result of the above factors, the Company does not consider itself to have any significant concentrations of credit risk.
Fair values of cash and cash equivalents and the current portion of long-term debt approximate cost due to the short period of time to maturity. Fair values of long-term debt, which have been determined based on borrowing rates currently available to the Company, or to other companies with comparable credit ratings, for loans with similar terms or maturity, approximate the carrying amounts in the consolidated financial statements.
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The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are held by major financial institutions.
Goodwill, representing the excess of the purchase price over the fair values of the net assets of acquired entities, was amortized on a straight-line basis over the period of expected benefit of 40 years through December 31, 2001. Covenants not to compete and other intangible assets with identifiable lives are being amortized over the period of expected benefit, generally five years.
In September 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141,Business Combinations and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 was effective for any business combinations completed after June 30, 2001 and SFAS No. 142 was effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill deemed to have indefinite lives is no longer amortized but is subject to annual impairment tests in accordance with the Statements. Other intangible assets continue to be amortized over their useful lives.
The Company has adopted the provisions of SFAS No. 141 for acquisitions completed subsequent to June 30, 2001 and has adopted SFAS No. 142 effective January 1, 2002. The Company performed a transitional assessment of impairment of goodwill by applying fair-value-based tests and has determined that no impairment existed at January 1, 2002. An annual assessment was also performed and the Company determined that no impairment existed at November 1, 2002. The pro forma effect of these new accounting rules on net income and earnings per share is as follows:
The provision for depreciation of property, plant and equipment is generally computed on the straight-line method at rates designed to distribute the cost of assets over the useful lives, estimated as follows:
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The Company reviews the recoverability of its long-lived assets as required by SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company has determined that no impairment of long-lived assets exists as of December 31, 2002.
The Company recognizes product revenue upon concluding that all of the fundamental criteria for product revenue recognition have been met. Such criteria are usually met at the time title to the product passes to the customer, typically upon delivery. The Company adopted Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101 Revenue Recognition in Financial Statements, in January 2001. The adoption of SAB No. 101 did not have a material effect on the financial position or results of operations of the Company.
The Company has one reportable business segment — metals service centers. The acquisitions made during 2002 did not result in new segments.
Although a variety of products are sold at each of the Company’s various locations, in total, sales were comprised of 59% carbon steel, 22% aluminum, and 15% stainless steel in 2002; 53% carbon steel, 25% aluminum, and 17% stainless steel in 2001; and 52% carbon steel, 26% aluminum, and 18% stainless steel in 2000.
The Company grants stock options with an exercise price equal to the fair value of the stock at the date of grant. The Company elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees and related interpretations. Under APB No. 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock at the date of grant, no compensation expense is recognized.
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The Company’s management is not aware of any environmental remediation obligations which would materially affect the operations, financial position or cash flows of the Company.
The currency effects of translating the financial statements of those foreign subsidiaries of the Company which operate in local currency environments are included in the “accumulated other comprehensive loss”
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component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in results of operations and were not material in each of the three years in the period ended December 31, 2002.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligationswhich is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the estimated useful life of the asset. The Company will adopt SFAS No. 143 on January 1, 2003 and does not believe that the impact of adoption will have a material impact on the Company’s financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses the financial accounting and reporting for certain costs associated with exit or disposal activities, including restructuring actions. SFAS No. 146 excludes from its scope severance benefits that are subject to an on-going benefit arrangement governed by SFAS No. 112, Employer’s Accounting for Postemployment Benefits, and asset impairments governed by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company will adopt SFAS No. 146 on January 1, 2003 and does not believe that the impact of adoption will have a material impact on the Company’s financial position or results of operations.
2. Investment in American Steel
Through April 30, 2002, the Company owned a 50% interest in the Membership Units of American Steel, L.L.C. (“American Steel”), which operates metals service centers in Portland, Oregon and Kent (Seattle), Washington and processes and distributes primarily carbon steel products. American Industries, Inc. (“Industries”) owned the other 50% interest in American Steel. The Operating Agreement (“Agreement”) gave the Company operating control over the assets and operations of American Steel. However, due to the existence of super-majority veto rights in favor of Industries prior to May 1, 2002, the Company accounted for this investment under the equity method and recorded its share of earnings based upon the terms of the Agreement.
Effective May 1, 2002, the Agreement was amended and one additional membership unit was issued to the Company, giving the Company 50.5% of the outstanding membership units. As part of the amendment, all super-majority and unanimous voting rights included in the Agreement were eliminated, among other changes. The Agreement, as amended, provides that the Company may purchase the remaining 49.5% of American Steel during a term of 90 days following the earlier of the death of the owner of Industries or April 1, 2006 and is required to purchase the remaining 49.5% of American Steel if Industries so elects during a term of 90 days following the earlier of the death of the owner of Industries or January 1, 2006. Due to this change in ownership structure, the Company began consolidating American Steel’s financial results as of May 1, 2002. American Steel had net sales of approximately $38,300,000 for the eight months ended December 31, 2002. American Steel will continue to maintain a separate credit facility. The Company’s consolidated balance sheet at December 31, 2002 includes assets and liabilities of American Steel of $51,650,000 and $34,912,000, respectively, including $24,470,000 of goodwill and $21,430,000 of debt. All significant intercompany transactions are eliminated in consolidation.
3. Acquisitions
On September 9, 2002, the Company, through a newly-formed subsidiary, purchased, for approximately $30,000,000, certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc.,
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after final approval of the U.S. Bankruptcy Court, through the Metals USA bankruptcy procedures. The business is now operating under its original name, Pacific Metal Company. Pacific Metal Company has locations in Portland, Eugene, and Medford, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana; and Boise, Idaho and processes and distributes mainly aluminum and coated carbon steel products. Net sales of Pacific Metal Company were approximately $22,000,000 for the period September 9, 2002 through December 31, 2002. This acquisition broadens the Company’s product offerings and also provides entries into new geographic markets in Idaho and Montana. Pacific Metal Company operates as a wholly-owned subsidiary of the Company. This purchase was funded with borrowings under the Company’s line of credit.
On April 1, 2002, the Company, through a newly-formed subsidiary, purchased substantially all of the net assets and business of Central Plains Steel Co., a privately-held, full-line carbon steel service center, with facilities in Kansas City and Wichita, Kansas. Central Plains Steel Co. had net sales of approximately $24,600,000 for the nine months ended December 31, 2002, and now operates as a wholly-owned subsidiary of the Company under its former name, Central Plains Steel Co. This acquisition strengthens the Company’s market presence and complements its existing facilities in this area of its geographic network. This purchase was funded with borrowings under the Company’s line of credit.
Also on April 1, 2002, the Company acquired all of the outstanding stock of Olympic Metals, Inc. (“Olympic”), a privately-held metals service center in Denver, Colorado. Olympic specializes in the processing and distribution of aluminum, red metals and stainless steel products and had net sales of approximately $4,800,000 for the nine months ended December 31, 2002. This acquisition strengthens the Company’s position and broadens its customer base in this area of its existing geographic network. Olympic operated as a wholly-owned subsidiary of the Company until December 31, 2002 when it was merged into the Company and now operates as a division. This acquisition was funded with cash generated from operations.
On July 2, 2001, through its newly-formed subsidiary, PDM Steel Service Centers, Inc. (“PDM”), the Company purchased the assets and assumed certain liabilities of the steel service centers division of Pitt-Des Moines, Inc., a publicly-held company, for approximately $93,200,000. Approximately one-half of the purchase price was paid in cash and one-half was paid by promissory note, which was paid off on July 6, 2001, following completion of a public equity offering. PDM processes and distributes carbon steel products consisting primarily of structurals and plate for the capital goods and construction industries. This acquisition strengthens the Company’s position in these products and industries in its existing markets and also provides entries into new geographic markets in Iowa and Nevada. PDM operates as a wholly-owned subsidiary of the Company. PDM is headquartered in Stockton, California, and at the time of the acquisition, had additional facilities in Fresno and Santa Clara, California; Cedar Rapids, Iowa; Sparks, Nevada; Spanish Fork, Utah; and the General Steel Corporation facility in Woodlands, Washington. At the close of business on December 31, 2001, General Steel Corporation was merged into PDM and now operates as a division of PDM. On April 1, 2002, the Cedar Rapids division of PDM began to operate as a division of Liebovich Bros., Inc. (“Liebovich”), a wholly-owned subsidiary of the Company. The cash portion of this acquisition was funded with borrowings under the Company’s line of credit.
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The following table summarizes the fair values of the assets acquired and liabilities assumed through PDM at the date of the acquisition. There were no intangible assets or goodwill recorded as a result of this acquisition.
On January 19, 2001, the Company acquired Aluminum and Stainless, Inc. (“A&S”), a privately-held metals service center in Lafayette, Louisiana. A&S processes and distributes primarily aluminum sheet, plate and bar products and operates as a wholly-owned subsidiary of the Company. The acquisition of A&S was funded with borrowings under the Company’s line of credit. In March 2001, A&S opened a branch in New Orleans, Louisiana through the purchase of certain assets of an existing metals service center.
On January 18, 2001, the Company acquired Viking Materials, Inc. (“Viking”), a privately-held metals service center in Minneapolis, Minnesota, and a related company, Viking Materials of Illinois, Inc. (“Viking Illinois”), near Chicago, Illinois. Viking and Viking Illinois provide value-added processing and distribution of primarily carbon steel flat-rolled products. Viking Illinois operated as a wholly-owned subsidiary of Viking through the close of business on December 31, 2001, when it was merged into Viking. Viking operates as a wholly-owned subsidiary of the Company. The acquisition of Viking and Viking Illinois was funded with borrowings under the Company’s line of credit.
On December 1, 2000, through its wholly-owned subsidiary Siskin Steel & Supply Company, Inc. (“Siskin”), the Company acquired the outstanding stock of East Tennessee Steel Supply, Inc. (“East Tennessee”), a privately-held metals service center located in Morristown, Tennessee. East Tennessee provides its customers in the Southeast region of the United States with value-added processing and distribution of carbon steel plate, bar and structurals. East Tennessee operated as a wholly-owned subsidiary of Siskin until the close of business on December 31, 2001, when it was merged into Siskin. The purchase of East Tennessee was funded with cash generated from operations.
On August 7, 2000, through its newly-formed company, United Alloys Aircraft Metals, Inc. (“United”), the Company purchased the net assets and business of the Aircraft Division of United Alloys, Inc. United is located in Vernon (Los Angeles), California, and provides its customers with value-added processed titanium products. United operated as a wholly-owned subsidiary of Service Steel Aerospace Corp. (“SSA”), a wholly-owned subsidiary of the Company, until it was merged into SSA at the close of business on December 31, 2001, and now operates as a division of SSA. The purchase of United was funded with borrowings under the Company’s line of credit.
On June 1, 2000, the Company acquired 100% of the outstanding stock of Toma Metals, Inc. (“Toma”), a privately-held metals service center based in Johnstown, Pennsylvania. Toma processes and distributes primarily stainless steel flat-rolled products. Toma operates as a wholly-owned subsidiary of the Company. The acquisition of Toma was funded with borrowings under the Company’s line of credit.
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On February 5, 2000, through its newly-formed company, Hagerty Steel & Aluminum Company (“Hagerty”), the Company purchased the net assets and business of the metals service center division of Hagerty Brothers Company, located in Peoria, Illinois. Hagerty processes and distributes primarily carbon steel products. Hagerty operated as a wholly-owned subsidiary of Liebovich until the close of business on December 31, 2001, when it was merged into Liebovich. The Hagerty assets were acquired with funds from borrowings under the Company’s line of credit.
These transactions were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair values at the date of the acquisition. In 2002, the Company recorded $1,100,000 as an intangible asset subject to amortization over 11 years related to the customer list of an acquired company and $3,000,000 as an intangible asset not subject to amortization related to the trade name of an acquired company (included in goodwill on the balance sheet). There were no material intangible asset additions in 2001. The excess of purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in goodwill additions of $34,173,000 (including $24,470,000 related to the consolidation of American Steel) for the year ended December 31, 2002. Of this amount, $4,289,000 is expected to be deductible for tax purposes in future years. Amortization expense for goodwill amounted to approximately $7,099,000 and $6,197,000 for the years ended December 31, 2001 and 2000, respectively.
The operating results of these acquisitions are included in the Company’s consolidated results of operations from the date of each acquisition. The following unaudited proforma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the year of acquisition and the year immediately preceding, after the effect of certain adjustments, including amortization of goodwill, interest expense on the acquisition debt and related income tax effects. These proforma results have been presented for comparative purposes only and are not indicative of what would have occurred had the acquisitions been made as of January 1, 2002, 2001 or 2000, appropriately, or of any potential results which may occur in the future.
4. Intangible Assets
At December 31, 2002 net intangible assets of approximately $4,505,000 are included in other assets, and consist of the following:
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Unamortizable intangible assets of $3,000,000 are included in goodwill as of December 31, 2002.
Amortization expense for intangible assets amounted to approximately $1,355,000, $1,541,000 and $1,227,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
The following is a summary of estimated aggregate amortization expense for each of the next five years (in thousands):
5. Inventories
Inventories of the Company have primarily been stated on the last-in, first-out (“LIFO”) method, which is not in excess of market. The Company uses the LIFO method of inventory valuation because it results in a better matching of costs and revenues. At December 31, 2002 and 2001, cost on the first-in, first-out (“FIFO”) method exceeds the LIFO value of inventories by $14,238,000 and $6,225,000, respectively. Inventories of $69,201,000 and $80,208,000 at December 31, 2002 and 2001, respectively, were stated on the FIFO method, which is not in excess of market. In 2001, the Company experienced an overall decrement in their LIFO layers, providing $11,680,000 of pretax income, as a result of historically low metals costs and a decrease in inventory quantities.
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6. Long-Term Debt
Long-term debt consists of the following:
The Company has a five-year syndicated credit agreement, as amended effective December 31, 2002, with nine banks for an unsecured revolving line of credit with a borrowing limit of $335,000,000 which may be increased to $400,000,000. At December 31, 2002, the Company also had $10,900,000 of letters of credit outstanding under the syndicated credit facility with availability to issue an additional $39,100,000 of letters of credit. The Company has $280,000,000 of outstanding senior unsecured notes issued in private placements of debt. These notes bear interest at an average fixed rate of 6.83% and have an average remaining life of 4.8 years, maturing from 2004 to 2010. American Steel’s credit agreement, as amended June 30, 2002, is secured by its working capital.
The Company’s credit agreements require the maintenance of a minimum net worth and interest coverage ratio, a maximum leverage ratio, and include certain restrictions on the amount of cash dividends payable, among other things. The syndicated credit facility includes a commitment fee on the unused portion, currently at an annual rate of 0.25%.
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The following is a summary of aggregate maturities of long-term debt for each of the next five years (in thousands):
7. Income Taxes
Deferred income taxes are computed using the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The provision for income taxes reflects the taxes to be paid for the period and the change during the period in the deferred tax assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities are as follows:
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Significant components of the provision for income taxes are as follows:
The reconciliation of income tax at the U.S. federal statutory tax rates to income tax expense is as follows:
8. Stock Option Plans
In 1994, the Board of Directors of the Company adopted an Incentive and Non-Qualified Stock Option Plan (“the 1994 Plan”). In May 2001, the shareholders approved an amendment to the 1994 Plan which increased the number of shares with respect to which options may be granted to 2,500,000 shares. There are 1,868,287 shares available for issuance with 1,227,850 of these shares granted and outstanding under the 1994 Plan as of December 31, 2002. The 1994 Plan provides for granting of stock options that may be either “incentive stock options” within the meaning of Section 422A of the Internal Revenue Code of 1986 (the “Code”) or “non-qualified stock options,” which do not satisfy the provisions of Section 422A of the Code. Options are required to be granted at an option price per share equal to the fair market value of common stock on the date of grant, except that the exercise price of incentive stock options granted to any employee who owns (or, under pertinent Code provisions, is deemed to own) more than 10% of the outstanding common stock of the Company, must equal at least 110% of fair market value on the date of grant. Stock options may not be granted longer than 10 years from the date of the 1994 Plan. All options granted have five year terms and vest at the rate of 25% per year, commencing one year from the date of grant.
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Transactions under the 1994 Plan are as follows:
In May 1998, the shareholders approved the adoption of a Directors Stock Option Plan for non-employee directors (the “Directors Plan”), which provides for automatic grants of options to non-employee directors. There are 292,000 shares of the Company’s common stock available for issuance with 157,500 of these shares granted and outstanding under the Directors Plan as of December 31, 2002. In February 1999, the Directors Plan was amended to allow the Board of Directors of the Company (the “Board”) authority to grant options to acquire the Company’s common stock to non-employee directors. Options under the Directors Plan are non-qualified stock options, with an exercise price at fair market value at the date of grant. All options granted expire five years from the date of grant. None of the stock options become exercisable until one year after the date of grant, unless specifically approved by the Board. In each of the following four years, 25% of the options become exercisable on a cumulative basis. Of the 105,000 options granted in March 1999, 20% were immediately exercisable upon grant, with 20% becoming exercisable in each of the following four years, as specifically approved by the Board.
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Transactions under the Directors Plan are as follows:
The following tabulation summarizes certain information concerning outstanding and exercisable options at December 31, 2002:
In December 2002, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 148, net income and earnings per share would have been reduced to the proforma amounts shown below:
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The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
9. Employee Benefits
The Company has an Employee Stock Ownership Plan (“the ESOP”) and trust that has been approved by the Internal Revenue Service as a qualified plan. The ESOP is a noncontributory plan that covers salaried and certain hourly employees of the Company. The amount of the annual contribution is at the discretion of the Board, except that the minimum amount must be sufficient to enable the ESOP trust to meet its current obligations.
Various 401(k) and profit sharing plans were maintained by the Company and its subsidiaries. Effective in 1998, the Reliance Steel & Aluminum Co. Master 401(k) Plan (the “Master Plan”) was established, which combined several of the various 401(k) and profit sharing plans of the Company and its subsidiaries into one plan. Salaried and certain hourly employees of the Company and its participating subsidiaries are covered under the Master Plan. The Master Plan will continue to allow each subsidiary’s Board to determine independently the annual matching percentage and maximum compensation limits or annual profit sharing contribution. Eligibility occurs after three months of service, and the Company contribution vests at 25% per year, commencing one year after the employee enters the Master Plan. Other 401(k) and profit sharing plans exist as certain subsidiaries have not yet combined their plans into the Master Plan as of December 31, 2002.
Effective January 1996, the Company adopted a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified pension plan that provides post-retirement pension benefits to key officers of the Company. The SERP is administered by the Compensation and Stock Option Committee (“Committee”) of the Board. Benefits are based upon the employees’ earnings. Life insurance policies were purchased for most individuals covered by the SERP and are funded by the Company. A separate SERP plan exists for one of the companies acquired during 1998 and for the Company’s 50.5%-owned company, each of which provides post-retirement pension benefits to its respective key employees. The SERP plans do not maintain their own plan assets, therefore plan assets and related disclosures have been omitted. However, the Company does maintain on its balance sheet assets to fund the SERP plans with a value of $10,247,000 and $7,704,000 at December 31, 2002 and 2001, respectively.
The net periodic pension costs for the SERP plans were as follows:
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The following is a summary of the status of the funding of the SERP plans:
In determining the actuarial present value of projected benefit obligations for the Company’s SERP plans, the assumptions were as follows:
Through the purchase of the net assets of the steel service centers division of Pitt-Des Moines, Inc. on July 2, 2001, the Company, through its subsidiary PDM, maintains defined benefit pension plans for certain of its employees. These plans generally provide benefits of stated amounts for each year of service or provide benefits based on the participant’s hourly wage rate and years of service. The plans permit the sponsor, at any time, to amend or terminate the plans subject to union approval, if applicable. The affected participants will be eligible to participate in the Company’s Master Plan at that time.
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The net periodic pension costs for the defined benefit pension plans covering certain employees were as follows:
The following is a summary of the status of the funding of the defined benefit plans:
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In determining the actuarial present value of projected benefit obligations for the Company’s defined benefit plans, the assumptions were as follows:
The Company participates in various multi-employer pension plans covering certain employees not covered under the Company’s benefit plans pursuant to agreements between the Company and collective bargaining units, who are members of such plans. In 2002, the Company made contributions to multi-employer defined benefit plans related to collective bargaining agreements in the amount of $2,086,000. Prior to 2002, the Company was unable to determine the amount of contributions made to defined benefit plans related to collective bargaining agreements.
The Company’s contribution expense for Company sponsored retirement plans was as follows:
The Company has a Key-Man Incentive Plan (the “Incentive Plan”) for division managers and officers, which is administered by the Compensation and Stock Option Committee of the Board. For 2002, 2001 and 2000, this incentive compensation bonus was payable 75% in cash and 25% in the Company’s common stock, with the exception of the bonus to officers, which may be paid 100% in cash at the discretion of the individual. The Company accrued $2,521,000 and $2,684,000 under the Incentive Plan as of December 31, 2002 and 2001, respectively. In March 2002 and 2001, the Company issued 8,886 and 8,334 shares of common stock to employees under the incentive bonus plan for the years ended December 31, 2001 and 2000, respectively.
10. Shareholders’ Equity
On July 5, 2001 the Company issued 6,325,000 shares of its common stock in a public equity offering, including the shares issued on exercise of the over-allotment option, at a price of $25.00 per share for total net proceeds of approximately $149,756,000, after deducting the underwriting discount and offering expenses. The Company used the net proceeds to pay down debt related to the July 2, 2001 acquisition of the steel service centers division of Pitt-Des Moines, Inc., and debt related to other acquisitions, capital expenditures and general working capital needs.
On October 30, 2000, the Company purchased 2,270,000 shares of its common stock at a cost of $19.35 per share under its Stock Repurchase Plan in a private transaction. The stock was purchased from the trust which was one of the Company’s largest shareholders. Thomas W. Gimbel, a member of the Board, is a co-trustee of the trust from which the shares were acquired. The purchase was financed under an existing credit facility, which was amended to increase the Company’s borrowing capacity by $50,000,000.
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In August 1998, the Board approved the purchase of up to an additional 3,750,000 shares of the Company’s outstanding common stock through its Stock Repurchase Plan (“Repurchase Plan”), for a total of up to 6,000,000 shares. The 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 December 31, 2002, the Company had repurchased a total of 5,538,275 shares of its common stock under the Repurchase Plan, at an average cost of $14.94 per share. The Company did not repurchase any shares in 2002 and 2001. During 2000, 2,865,950 shares were repurchased by the Company, including those purchased in the private transaction discussed above, at an average price of $19.64 per share.
SFAS No. 130, Reporting Comprehensive Income, defines comprehensive income (loss) as non-stockholder changes in equity. Accumulated other comprehensive loss included the following:
Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries. The 2002 adjustments to unrealized loss on investments and minimum pension liability are $195,000 and $637,000 net of taxes, respectively.
11. Commitments and Contingencies
The Company leases land, buildings and equipment under noncancelable operating leases expiring in various years through 2013. Several of the leases have renewal options providing for additional lease periods. Future minimum payments, by year and in the aggregate, under the noncancelable leases with initial or remaining terms of one year or more, consisted of the following at December 31, 2002 (in thousands):
Total rental expense amounted to $18,930,000, $14,625,000 and $12,273,000 for 2002, 2001 and 2000, respectively.
Included in the amounts above are lease payments to various related parties in the amount of $4,651,000, $2,482,000 and $2,014,000 for 2002, 2001 and 2000, respectively. These related party leases are for buildings and expire in various years through 2008.
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flow of the Company.
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12. Earnings Per Share
The Company calculates basic and diluted earnings per share as required by SFAS No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is calculated including the dilutive effects of warrants, options, and convertible securities, if any. The following table sets forth the computation of basic and diluted earnings per share:
The computations of earnings per share for 2002, 2001 and 2000 do not include 45,000, 322,000 and 385,000 shares, respectively, of stock options because their inclusion would have been anti-dilutive.
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QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 2002, 2001 and 2000:
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere in the Annual Report on Form 10-K.
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
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There have been no changes in or disagreements with the Company’s accountants on any accounting or financial disclosure issues.
PART III
The narrative and tabular information included under the caption “Management” on pages 6 through 8 and under the caption “Compliance with Section 16(a)” on page 19 of the Proxy Statement are incorporated herein by reference.
The narrative and tabular information, including footnotes thereto, included under the caption “Executive Compensation” on pages 12 through 16 of the Proxy Statement are incorporated herein by reference.
The narrative and tabular information, including footnotes thereto, included under the caption “Securities Ownership of Certain Beneficial Owners and Management” on pages 3 and 4 of the Proxy Statement are incorporated herein by reference.
The narrative information included under the caption “Certain Transactions” on page 18 of the Proxy Statement is incorporated herein by reference.
(a) Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
PART IV
(a) The following documents are filed as part of this report:
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited) for the Years Ended December 31, 2002, 2001 and 2000
(3) Exhibits
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(b) Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on this 27th day of March, 2003.
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, David H. Hannah, hereby certify that:
Dated: March 27, 2003
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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Karla R. McDowell, hereby certify that:
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POWER OF ATTORNEY
The officers and directors of Reliance Steel & Aluminum Co. whose signatures appear below hereby constitute and appoint David H. Hannah and Gregg J. Mollins, or either of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for each of them in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated.
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EXHIBIT INDEX