SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2005
OR
For the transition period from to
Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.
350 South Grand Avenue, Suite 5100Los Angeles, California 90071(213) 687-7700(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
As of April 30, 2005, 32,907,174 shares of the registrant’s common stock, no par value, were outstanding.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three months in the period ended March 31, 2005 are not necessarily indicative of the results for the full year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2004, included in the Reliance Steel & Aluminum Co. Form 10-K.
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 and the disclosure of contingent amounts in the Company’s consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.
The Company’s consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. The ownership of the other interest holders of consolidated subsidiaries is reflected as minority interest. All significant intercompany accounts and transactions have been eliminated.
2. Impact of Recently Issued Accounting Principles
In April 2005, the United States Securities and Exchange Commission (“SEC”) approved a new rule that delays the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment. Except for this deferral of the effective date, the guidance in SFAS No. 123R is unchanged. Under the SEC’s rule, SFAS No. 123R is now effective for the Company for annual, rather than interim, periods that begin after June 15, 2005. The Company will apply this Statement to all awards granted on or after January 1, 2006 and to awards modified, repurchased, or cancelled after that date. We expect that the implementation of the provisions of SFAS No. 123R will have an impact consistent with our disclosures included under SFAS No. 148 in our December 31, 2004 Form 10-K.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
3. Long-Term Debt
Long-term debt consists of the following:
The Company has a five-year syndicated credit agreement, as amended, with ten 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 March 31, 2005 the Company also had $16,911,000 of letters of credit outstanding under the syndicated credit facility with availability to issue an additional $33,089,000 of letters of credit. The syndicated credit facility includes a commitment fee on the unused portion, currently at an annual rate of 0.175%.
The Company has $370,000,000 of outstanding senior unsecured notes issued in private placements of debt. The outstanding senior notes bear interest at an average fixed rate of 6.17% and have an average remaining life of 4.7 years, maturing from 2005 to 2013.
Both the syndicated credit agreement and the senior notes became secured on July 1, 2003 concurrent with the Company’s acquisition of Precision Strip, Inc. The personal property pledged as collateral included, but was not limited to, the outstanding securities of each of the Company’s material corporate subsidiaries. The security interest was to terminate when the Company met certain conditions, including a required leverage ratio. In the first quarter of 2005 the security interest granted under our syndicated credit facility and our senior note agreements was automatically released as the Company met the required conditions of the release. These agreements are now unsecured.
The Company’s syndicated credit agreement and senior note agreements, as amended, also require the Company to maintain a minimum net worth and interest coverage ratio, a maximum leverage ratio, and include certain restrictions on the amount of cash dividends the Company may pay, among other things.
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4. Shareholders’ Equity
In the three months ended March 31, 2005, the Company issued 230,125 shares of common stock in connection with the exercise of employee stock options for total proceeds of approximately $5,752,000. The tax benefit to the Company associated with these exercises amounted to approximately $1,387,000. In addition, 5,582 shares of common stock were issued to division managers of the Company in February 2005 under the Key Man Incentive Plan for 2004. We did not repurchase any shares of our common stock during the 2005 first quarter.
Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income, defines comprehensive income (loss) as non-stockholder changes in equity. Comprehensive income for each of the three-month periods ended March 31, 2005 and 2004, respectively, included the following:
Accumulated other comprehensive income included the following:
Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries. Unrealized loss on investments and minimum pension liability are net of taxes of $(14,000) and $692,000, respectively, as of March 31, 2005 and $(54,000) and $692,000 respectively, as of December 31, 2004.
5. Stock Option Plans
In accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the Company continues 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.
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If the Company had elected to recognize compensation cost based on the estimated 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 pro forma amounts shown below:
6. Employee Benefits
The Company maintains a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified pension plan that provides post-retirement pension benefits to key officers of the Company. Separate SERP plans exist for one of the companies acquired during 1998 and for the Company’s 50.5%-owned company, each of which provides post-retirement benefits to its respective key employees.
The Company maintains, through various subsidiaries, 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 net periodic pension costs for the SERP and defined benefit plans for the three months ended March 31 were as follows (in thousands):
The Company previously disclosed in its financial statements for the year ended December 31, 2004, included in its Form 10-K, that it expected to contribute $1,697,000 to its defined benefit plans in 2005. As of March 31, 2005,
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contributions of $185,000 had been made. The Company also disclosed in its Form 10-K for the year ended December 31, 2004 that it terminated one of the defined benefit plans as of that date and expects to distribute the assets in 2005.
7. 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 exclude 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:
There were no anti-dilutive shares reserved for issuance upon exercise of stock options for the three months ended March 31, 2005. The computations of earnings per share for the three months ended March 31, 2004 do not include 7,500 shares reserved for issuance upon exercise of stock options because their inclusion would have been anti-dilutive.
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Item 2. Management’s Discussion And Analysis of Financial Condition And Results of Operations
The following table sets forth certain income statement data for the three-month periods ended March 31, 2005 and 2004 (dollars are shown in thousands and certain amounts may not calculate due to rounding):
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
In the three months ended March 31, 2005, our consolidated net sales increased 23.8% to $811.9 million, compared to $655.8 million for the first three months of 2004. This includes a 15.4% decrease in our tons sold and a 47.1% increase in our average selling price per ton sold (the tons sold and average selling price per ton sold exclude the amounts related to Precision Strip). Our volume was down from the 2004 first quarter mainly because of the heavy buying that occurred in March of 2004 when our customers were trying to beat the significant carbon steel cost increases that had been announced by the mills.
The increase in our average selling price per ton sold of 47.1% resulted mainly from increased costs for most products that we sell and because of a shift in product mix. Carbon steel costs rose significantly beginning in the second quarter of 2004 and although prices have recently declined somewhat, they are well above the 2004 first quarter levels. Aluminum and stainless steel costs for aerospace products increased steadily throughout 2004 and have continued to increase in 2005. The improved demand for aerospace products has also resulted in a slight shift in product mix with aluminum, stainless steel and titanium increasing as a percentage of our sales while carbon steel decreased almost 3% from the 2004 first quarter.
Total gross profit increased 15.2% to $215.9 million for the first three months of 2005 compared to $187.4 million in the first three months of 2004. This increase is mainly due to our increased sales levels. Gross profit as a percentage of sales in the 2005 first quarter was 26.6%, down from 28.6% in the 2004 first quarter. Although our gross profit margins improved for many of our aluminum and stainless steel products, this was offset by declines in our gross profit margins for carbon steel products. Due to more availability of carbon steel products, competitive pressures caused these prices to fall more than our costs fell. In the 2005 first quarter, LIFO expense was $12.5 million mainly because of cost increases for stainless steel and aluminum products. This is down from our 2004 first quarter LIFO expense of $27.5 million that resulted from the significant increases in carbon steel costs that occurred at that time. LIFO expense is included in cost of sales.
Warehouse, delivery, selling, general and administrative (“S,G&A”) expenses, increased $3.3 million, or 2.8%, compared to the 2004 first quarter due mainly to general increases for labor, insurance and other costs. S,G&A expenses as a percentage of sales for the 2005 first quarter were 15.0%, down from 18.1% for the 2004 first quarter,
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due mainly to our increased selling prices.
Depreciation expense in the 2005 first quarter was $10.4 million compared to $10.2 million in the 2004 first quarter. Amortization expense was $0.8 million in both quarters.
Operating profit in the 2005 first quarter was $83.8 million, or 10.3%, compared to $58.7 million, or 9.0%, in the 2004 first quarter. The improvement is mainly due to the higher gross profit dollars resulting from increased pricing levels, along with effective expense control.
Interest expense decreased to $6.3 million from $7.5 million in the 2004 first quarter, due to lower borrowing levels because of the strong cash flow that we generated in late 2004 and the 2005 first quarter.
Minority interest expense increased from 2004 mainly due to the improved operating performance at our 50.5%-owned company, American Steel, L.L.C. In 2004, minority interest also included expense for the profit contribution from Valex Korea that was attributable to our 30.5% partner. In July 2004, we acquired the remaining interest in Valex Korea from this partner.
Our effective income tax rate for the 2005 first quarter was 38.0%, down from 39.3% in the 2004 first quarter. Our 2004 full-year tax rate was 37.1%. The changes in our tax rate are mainly due to changes in the geographic composition of our income, lower tax rates from our foreign operations that are profitable and benefits from state and city income tax credits.
Liquidity and Capital Resources
At March 31, 2005, our working capital was $484.0 million compared to $458.6 million at December 31, 2004. The increase was mainly due to an increase in our accounts receivable of $41.9 million and an increase in our inventory of $33.4 million resulting from improved sales levels, offset by an increase in our accounts payable and accrued expenses of $48.3 million mainly due to our increased inventory purchases in the first quarter of 2005 to support our increased sales levels.
To manage our working capital, we focus on our number of 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. As of March 31, 2005, our days sales outstanding were approximately 42 days, up slightly from 41 days at year-end 2004. (We calculate our days sales outstanding as an average of the most recent two-month period.) Our inventory turn rate at March 31, 2005 was about 4.8 times, down slightly from 5.1 times in 2004.
Our primary sources of liquidity are generally from internally generated funds from operations and our revolving line of credit. Cash flows provided by operations were $35.8 million in the 2005 first quarter. This compares to $12.2 million of cash flow used in operations in the 2004 first quarter. We used this cash flow to pay down debt of $27.3 million and to fund our capital expenditures of $10.8 million in the 2005 first quarter. Our outstanding debt at March 31, 2005 was $400.0 million, compared to $427.3 million at year-end 2004. At March 31, 2005, we had $26 million borrowed on our $335 million revolving line of credit, which includes $23 million of borrowings on the credit line to pay down a private placement note as it matured on January 2, 2005. Our net debt-to-total capital ratio was 30.7% at March 31, 2005, down from 33.6% at year-end 2004.
The Company has a five-year syndicated credit agreement, as amended, with ten 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 March 31, 2005 the Company also had $16,911,000 of letters of credit outstanding under the syndicated credit facility with availability to issue an additional $33,089,000 of letters of credit.
The Company also has $370,000,000 of outstanding senior unsecured notes issued in private placements of debt. The outstanding senior notes bear interest at an average fixed rate of 6.17% and have an average remaining life of 4.7 years, maturing from 2005 to 2013.
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Both the syndicated credit agreement and the senior notes became secured on July 1, 2003 concurrent with our acquisition of Precision Strip, Inc. The personal property pledged as collateral included, but was not limited to, the outstanding securities of each of our material corporate subsidiaries. The security interest was to terminate when we met certain conditions, including a required leverage ratio. In the first quarter of 2005 the security interest granted under our syndicated credit facility and our senior note agreements was automatically released as we met the required conditions of the release due to our strong earnings in 2004. These agreements are all now unsecured.
We did not repurchase any shares of our common stock during the 2005 first quarter. Proceeds from the issuance of common stock upon exercise of stock options during the 2005 first quarter were $5.8 million.
Capital expenditures were $10.8 million for the three months ended March 31, 2005. We had no material changes in commitments for capital expenditures, operating lease obligations or purchase obligations as of March 31, 2005, as compared to those disclosed in our table of contractual obligations included in our Form 10-K for the year ended December 31, 2004. We anticipate that funds generated from operations and funds available under our line of credit will be sufficient to meet our working capital and capital expenditure needs and to fund acquisitions in the foreseeable future.
Seasonality
Some of our customers may be in seasonal businesses, especially customers in the construction industry. As a result of our geographic, product and customer diversity, however, our operations have not shown any material seasonal trends. Revenues in the months of November and December traditionally have been lower than in other months because of a reduced number of working days for shipments of our products and holiday closures for some of our customers. We cannot assure you that period-to-period fluctuations will not occur in the future. Results of any one or more quarters are, therefore, not necessarily indicative of annual results.
Goodwill
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $341.8 million at March 31, 2005, or approximately 20.9% of total assets or 39.1% of consolidated shareholders’ equity.
Pursuant to SFAS No. 142, we review the recoverability of goodwill annually or whenever significant events or changes occur which might impair the recovery of recorded costs. Our annual impairment tests of goodwill were performed as of November 1, 2004 and it was determined that the recorded amounts for goodwill are recoverable and that no impairment existed. We are not aware of any significant events or changes that would affect the recoverability of those amounts as of March 31, 2005.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. When we prepare these 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 and long-lived assets. 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements see our December 31, 2004 Form 10-K.
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Item 3. 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.
Item 4. Controls And Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 or 15d-15(e) under the Securities Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered in this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings with the SEC. There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Form 10-Q may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has no control. These risk factors and additional information are included in the Company’s Annual Report on Form 10-K.
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PART II – OTHER INFORMATION
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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