SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2002
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 x No o
As of July 31, 2002, 31,717,962 shares of the registrant’s common stock, no par value, were outstanding.
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
i
CONSOLIDATED BALANCE SHEETS(In thousands except share amounts)
See accompanying notes to consolidated financial statements.
1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME(In thousands except share and per share amounts)
2
3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation, with respect to the interim financial statements have been included. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results for the full year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2001, included in the Reliance Steel & Aluminum Co. Annual Report on Form 10-K. Certain reclassifications have been made to the 2001 balances to conform to the 2002 presentation.
2. Impact of Recently Issued Accounting Standards
In June 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 is effective for any business combinations completed after June 30, 2001 and SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will 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 has 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. The pro forma effect of these new accounting rules on net income and earnings per share for the three and six months ended June 30, 2001 is as follows:
5
3. Acquisitions
On April 1, 2002, the Company, through a newly-formed subsidiary, purchased substantially all of the business and net assets 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 sales of approximately $39 million for the year ended December 31, 2001, and now operates as a wholly-owned subsidiary of the Company. 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., 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 sales of approximately $8 million for the twelve months ended December 31, 2001. Olympic operates as a wholly-owned subsidiary of the Company. This acquisition was funded with cash generated from operations.
These transactions have been accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated statements of income include the revenues and expenses of each acquisition since its respective acquisition date. The consolidated financial statements reflect the preliminary allocation of the purchase price. The allocations of purchase price were based upon the preliminary estimation of fair values of the net assets purchased.
Effective May 1, 2002, the Operating Agreement of American Steel, L.L.C. (“American Steel”) 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 Operating Agreement were eliminated, among other changes. Due to this change in ownership structure, the Company began consolidating American Steel’s financial results as of May 1, 2002. American Steel will continue to maintain a separate credit facility and had outstanding debt of $20.2 million at June 30, 2002. All significant inter-company transactions are eliminated in consolidation.
6
4. Long-Term Debt
Long-term debt consists of the following:
The Company has a five-year syndicated credit agreement with nine banks for an unsecured revolving line of credit with a borrowing limit of $335 million which may be increased to $400 million. The Company has $280 million of outstanding senior unsecured notes issued in private placements of debt. The outstanding senior notes bear interest at an average fixed rate of 6.83% and have an average life of 5.3 years, maturing from 2004 to 2010. American Steel has a two-year syndicated credit agreement, as amended, effective June 30, 2002, that is secured by its working capital with a borrowing limit of $24 million.
The Company’s long-term loan agreements require the Company to maintain a minimum net worth and include certain restrictions on the amount of cash dividends that the Company may pay, among other things. The syndicated credit facility includes a commitment fee on the unused portion, currently at an annual rate of 0.25%.
5. Shareholders’ Equity
In March 2002, 8,334 shares of common stock were issued to division managers and certain officers of the Company under the Key-Man Incentive Plan for 2001.
Accumulated other comprehensive loss of $0.5 million ($0.3 million net of tax) and $1.0 million ($0.6 million net of tax) at June 30, 2002 and December 31, 2001, respectively, consists of foreign currency translation adjustments.
7
6. 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:
7. Subsequent Events
On August 7, 2002 the Company announced that it had signed agreements to acquire from Metals USA, Inc. the assets of two of its businesses. The transactions are subject to the final approval of the U.S. Bankruptcy Court, in connection with Metals USA’s bankruptcy filing. These asset purchase agreements are subject to a thirty-day Court required auction process which will conclude by early September 2002. During this period additional offers can be received through the Court process.
The businesses include Metals USA Specialty Metals Northwest, Inc. based in Portland, Oregon, with additional divisions in Eugene, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana and Boise, Idaho. This business was formerly known as Pacific Metal Company and is primarily involved in the processing and distribution of aluminum and coated carbon steel products. Sales for this business were $76.2 million for the year ended December 31, 2001.
The second business is the Milwaukee, Wisconsin operation of Metals USA Plates and Shapes Northcentral, Inc. This operation was previously known as Williams Steel & Supply Co., Inc. and processes and distributes mainly carbon steel plate, bar and structural products with sales of $37.4 million for the year ended December 31, 2001.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain income statement data for each of the periods indicated (dollars are shown in thousands and certain amounts may not calculate due to rounding):
2002 Acquisitions
On April 1, 2002, we purchased substantially all of the business and net assets of Central Plains Steel Co. through a newly-formed subsidiary. Central Plains Steel Co., a full-line carbon steel service center with facilities in Kansas City and Wichita, Kansas, had sales of approximately $39 million for the year ended December 31, 2001. This purchase was funded with borrowings under our line of credit.
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 sales of approximately $8 million for the twelve months ended December 31, 2001. We funded this acquisition with cash generated from operations.
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 American Steel’s credit facility. American Steel had sales of $72 million for the twelve months ended December 31, 2001.
2001 Acquisitions
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. (“PDM”). PDM processes and distributes carbon steel products consisting primarily of structurals and plate for the capital goods and construction industries and had net sales of approximately $86 million for the six months ended December 31, 2001. PDM operates six metals service center facilities in Fresno, Santa Clara and Stockton (headquarters), California; Sparks, Nevada; Spanish Fork, Utah; and Woodlands, Washington. This acquisition included a seventh metals service center facility in Cedar Rapids, Iowa that became a division of our subsidiary Liebovich Bros., Inc. on April 1, 2002.
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 that provide various services for offshore oil rigs. In March 2001, we opened a branch operation of Aluminum and Stainless in New Orleans, Louisiana, through the purchase of certain assets of an existing metals service center. Aluminum and Stainless had net sales of approximately $30 million for the period January 20, 2001 to December 31, 2001, including the sales of the New Orleans branch.
9
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 and had consolidated revenues of approximately $68 million for the period January 19, 2001 to December 31, 2001. Viking Materials of Illinois, Inc. has been merged into Viking Materials, Inc.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
In the three months ended June 30, 2002, our consolidated net sales increased 9.3% to $450.2 million, compared to the same period of 2001. This includes an increase of 22.4% in tons sold and a decrease in the average selling price per ton of 11.0%. The increase in tons sold was primarily due to the sales generated by the companies we acquired in 2002 and 2001. The decrease in our average selling price per ton of 11.0% resulted mainly from lower metals costs for many of our products as compared to the same period of 2001 and because of a shift in product mix, with an increase of 8.0% in carbon steel product sales during the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. This shift was mainly due to our acquisitions but was also impacted by the decreased sales of mostly aluminum and stainless steel products to the semiconductor, electronics and aerospace industries in the 2002 second quarter.
Same-store sales (excluding sales generated by the companies we acquired since the beginning of 2001) decreased $28.6 million, or 7.4% in the three months ended June 30, 2002, reflecting a decrease of 2.8% in tons sold, and a decrease of 5.0% in average selling price per ton from the 2001 period. The decrease in same-store tons sold resulted from the continued general downturn in the economy, especially related to the aerospace industry. Our sales to the aerospace industry decreased 32.3% in the 2002 second quarter as compared to the 2001 second quarter, with a 23.7% decrease in tons sold and an 11.4% decrease in the average selling price.
Total gross profit increased 9.8% to $126.0 million for the second quarter of 2002 compared to $114.8 million in the second quarter of 2001. As a percentage of sales, gross profit was 28.0% in the three months ended June 30, 2002, comparable to 27.9% in the three months ended June 30, 2001. We were able to maintain our gross margin as a percentage of sales during a period when the costs of certain carbon steel products were rising, because of our ability to increase our selling prices. We do not know if we will be able to continue to maintain our gross margin percentage in future quarters since the increases in costs have not been driven by demand.
Warehouse, delivery, selling, general and administrative (“S,G&A”) expenses increased $14.0 million, or 17%, in the second quarter of 2002 compared to the corresponding period of 2001, and amounted to 21.4% of sales in the 2002 second quarter and 20.0% of sales in the 2001 second quarter. The dollar increase in S,G&A expenses includes the expenses of the businesses we acquired after the second quarter of 2001. The second quarter of 2002 S,G&A expense as a percent of sales is up from the 2001 second quarter mainly due to the effect of the lower sales prices for our products during the 2002 period.
Depreciation and amortization expense decreased $0.7 million, or 9.2%, during the three months ended June 30, 2002, compared to the corresponding period of 2001. This decrease is primarily due to the change in accounting rules for the amortization of goodwill that were effective for us on January 1, 2002. The second quarter of 2001 included $1.8 million, or $.03 per diluted share, of goodwill amortization expense compared to none in the second quarter of 2002.
Interest expense decreased by 21.8% to $5.7 million in the 2002 second quarter compared to $7.2 million in the 2001 second quarter, due to both lower borrowing levels and lower interest rates.
Because of our increased ownership in American Steel, and the elimination of all super-majority and unanimous voting rights included in the Operating Agreement, we began to consolidate its results beginning May 1, 2002 rather than account for our investment on 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 30. The minority interest amount represents 49.5% of American Steel’s net loss, beginning May 1, 2002 for the portion we do not own. Our consolidated balance sheet at June 30, 2002 includes the assets and liabilities of American Steel, including $24.5 million of goodwill and $20.2 million of debt. The minority interest liability on our balance sheet includes the 49.5% of American Steel that we do not own.
10
Our effective income tax rate increased to 39.6% for the 2002 second quarter, compared to 38.7% for the 2001 second quarter, primarily due to shifts in our geographic composition.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Consolidated net sales were $855.7 million for the six months ended June 30, 2002, an increase of 1.3% from the six months ended June 30, 2001. The 2002 six-month sales represent an increase of 16.8% in tons sold and a decrease in the average selling price per ton of 13.5%. The increase in our tons sold was primarily due to the sales of the companies we acquired in 2002 and 2001. The decrease in our average selling price per ton of 13.5% resulted mainly from lower metals costs for many of our products as compared to the same period of 2001 and because of a shift in product mix, with an increase of 8.0% in carbon steel product sales during the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. This shift was mainly due to our acquisitions but was also impacted by the decreased sales of aluminum and stainless steel products to the semiconductor, electronics and aerospace industries in the 2002 second quarter.
Our same-store sales decreased $98.9 million, or 12.4%, in the 2002 six-month period. Same-store tons sold decreased by 4.4% due to the continued general downturn in the economy, especially in the aerospace industry. Our sales to the aerospace industry decreased 28.4% in the six months ended June 30, 2002 as compared to the same period in 2001, with a 21.8% decrease in tons sold and an 8.5% decrease in the average selling price.
Total gross profit was $237.6 million for the first six months of 2002, a 1.0% increase, compared to $235.1 million in the first six months of 2001. As a percentage of sales, gross profit was consistent at 27.8% for the six months ended June 30, 2002 and 2001.
S,G&A expenses for the six months ended June 30, 2002 increased $16.8 million, or 10.1% compared to the corresponding period of 2001, mainly because we included the S,G&A expenses of the businesses we acquired in 2002 and 2001. S,G&A expenses were 21.5% as a percent of sales for the six-month period of 2002, up from 19.8% for the same six-month period of 2001. The increase as a percent of sales was because of the lower sales prices for our products being experienced company-wide. On a same-store basis, S,G&A expense decreased $5.7 million, or 3.6% for the 2002 six-month period compared to the 2001 period. The majority of the same-store expense decrease resulted from headcount reductions, as we reduced our workforce by 7.7% during the twelve months ended June 30, 2002.
Depreciation and amortization expense decreased $1.6 million during the six months ended June 30, 2002, compared to the corresponding period of 2001. This decrease is due to the change in accounting rules for the amortization of goodwill that were effective for us on January 1, 2002. The first six months of 2001 included $3.5 million, or $.07 per diluted share, of goodwill amortization expense compared to none for the 2002 six-month period.
Interest expense decreased by 25.9% to $11.0 million in the first six months of 2002 compared to $14.9 million in the 2001 period, due to both lower borrowing levels and lower interest rates.
Our effective income tax rate was 39.6% for the first six months of 2002, compared to 39.0% for the first six months of 2001. The increase in our effective rate was primarily due to shifts in our geographic composition.
Liquidity and Capital Resources
At June 30, 2002, working capital amounted to $392.5 million compared to $380.0 at December 31, 2001. The increase was mainly due to companies we acquired in 2002. Excluding the effect of these acquisitions, we experienced an increase in our accounts receivable resulting from improved sales levels in the first six months of 2002 compared to the fourth quarter of 2001 levels. This increase in sales, along with our focus on inventory management, resulted in a decrease in our inventory of $23.9 million, excluding the effect of our 2002 acquisitions. In addition, accounts payable increased by $17.5 million, also excluding the effect of our 2002 acquisitions. Our capital requirements are primarily for working capital, acquisitions, and capital expenditures for continued improvements in plant capacities and materials handling and processing equipment.
11
Our primary sources of liquidity are generally from internally generated funds from operations and our revolving line of credit. In 2001, we also raised net proceeds of $149.8 million in a secondary equity offering. These funds were used to pay down debt. Cash of $46.3 million was provided by operations in the six months ended June 30, 2002, as compared to $38.4 million of cash provided by operations during the corresponding period of 2001. This increase was primarily due to the working capital changes discussed above. Cash provided by our 2002 operations was used to pay down debt including debt incurred to fund our 2002 acquisitions. At June 30, 2002 our net debt-to-total capital ratio was 36.1% compared to 51.3% at June 30, 2001.
Our syndicated credit facility has a borrowing limit of $335.0 million, which can be increased to $400.0 million. At June 30, 2002, $40.0 million was outstanding under this credit facility. American Steel’s syndicated credit facility, as amended, effective June 30, 2002, has a borrowing limit of $24.0 million. At June 30, 2002, $20.2 million was outstanding under this credit facility. We also have senior unsecured notes outstanding in the aggregate amount of $280.0 million. During the first quarter of 2002, we paid off a $10.0 million note upon its maturity. The senior notes have maturity dates ranging from 2004 to 2010, with an average life of 5.3 years. The senior notes bear interest at an average fixed rate of 6.83% per annum.
Our capital expenditures, excluding acquisitions, were $8.7 million for the six months ended June 30, 2002. We had no material commitments for capital expenditures as of June 30, 2002. We anticipate that funds generated from our operations and funds available under our line of credit will be sufficient to meet our working capital needs for the foreseeable future.
Seasonality
Some of our customers are 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 $282.9 million at June 30, 2002, or approximately 24.8% of total assets or 47.0% of consolidated shareholders’ equity.
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. 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 will continue to be amortized over their useful lives. We have adopted the provisions of SFAS No. 141 for acquisitions completed subsequent to June 30, 2001 and have adopted SFAS No. 142 effective January 1, 2002. Pursuant to SFAS No. 142, we have performed a transitional assessment of impairment of goodwill by applying fair-value-based tests to our identified operating segments and have determined that no impairment of goodwill existed at January 1, 2002.
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. 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, equity investment, goodwill and intangible 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
12
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, 2001 Form 10-K.
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 metal 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 our market value of 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.
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 and the Company’s Prospectus dated June 28, 2001 filed under Rule 424(b).
13
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
14
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.
15