-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EG2nmSWG0CyFkDeP0OrU9X3jSg9n40CaL5Bv1MJ18ZaPT0lyZCu0Y/WShyUjHaJm 2TRZehurvt0sRczQM/T5KQ== 0000950150-98-001417.txt : 19980817 0000950150-98-001417.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950150-98-001417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELIANCE STEEL & ALUMINUM CO CENTRAL INDEX KEY: 0000861884 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 951142616 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13122 FILM NUMBER: 98691755 BUSINESS ADDRESS: STREET 1: 2550 EAST 25TH ST CITY: LOS ANGELES STATE: CA ZIP: 90058 BUSINESS PHONE: 2135822272 MAIL ADDRESS: STREET 1: 2550 E. 25TH STREET CITY: LOS ANGELES STATE: CA ZIP: 90058 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 06/30/1998 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .................... to ........................ Commission file number: 001-13122 RELIANCE STEEL & ALUMINUM CO. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-1142616 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2550 East 25th Street Los Angeles, California 90058 (213) 582-2272 ------------------------------------------------------------- (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 1998, 18,869,352 shares of the registrant's common stock, no par value, were outstanding. 2 INDEX
PART I -- FINANCIAL INFORMATION ............................................... 1 Consolidated Balance Sheets .......................................... 1 Consolidated Statements of Income (Unaudited) ........................ 2 Consolidated Statements of Cash Flows (Unaudited) .................... 4 Notes to Consolidated Financial Statements (Unaudited) ............... 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................ 8 PART II -- OTHER INFORMATION ................................................. 12 SIGNATURES ................................................................... 14
3 PART I -- FINANCIAL INFORMATION RELIANCE STEEL & ALUMINUM CO. Consolidated Balance Sheets (In thousands except share amounts)
JUNE 30, DECEMBER 31, 1998 1997 (unaudited) (Note) ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 29 $ 34,047 Accounts receivable, less allowance for doubtful accounts of $5,396 at June 1998 and $4,343 at December 1997 148,739 117,733 Inventories 198,105 158,736 Prepaid expenses and other current assets 2,140 2,472 Deferred income taxes 9,086 9,086 --------- --------- Total current assets 358,099 322,074 Property, plant and equipment, at cost: Land 28,611 26,348 Buildings 109,367 95,424 Machinery and equipment 118,919 104,064 Allowances for depreciation (71,685) (64,872) --------- --------- 185,212 160,964 Investment in 50%-owned company 30,695 28,760 Goodwill 107,784 67,258 Other assets 4,954 4,810 --------- --------- Total assets $ 686,744 $ 583,866 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 111,269 $ 91,916 Wages and related accruals 5,670 7,658 Deferred income taxes 9,148 9,148 Current maturities of long-term debt 100 100 --------- --------- Total current liabilities 126,187 108,822 Long-term debt 205,350 143,350 Deferred income taxes 18,466 18,530 Shareholders' equity: Preferred stock, no par value: Authorized shares - 5,000,000 None issued or outstanding -- -- Common stock, no par value: Authorized shares - 100,000,000 at June 30, 1998 and 20,000,000 at December 31, 1997 Issued and outstanding shares - 18,869,352 at June 1998 and 18,831,458 at December 1997, stated capital 155,347 154,761 Retained earnings 181,394 158,403 --------- --------- Total shareholders' equity 336,741 313,164 --------- --------- Total liabilities and shareholders' equity $ 686,744 $ 583,866 ========= =========
See Notes to Consolidated Financial Statements. NOTE: The Balance Sheet at December 31, 1997 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 1. 4 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Income (Unaudited) (In thousands except share and per share amounts)
THREE MONTHS ENDED JUNE 30, -------------------------------- 1998 1997 ---------- ---------- Net sales $ 326,184 $ 243,824 Gain on sale of real estate -- 1,008 Other income 703 638 ---------- ---------- 326,887 245,470 Costs and expenses: Cost of sales 248,390 187,922 Warehouse, delivery, selling, administrative and general 51,014 38,907 Depreciation and amortization 4,610 3,247 Interest 3,321 2,862 ---------- ---------- 307,335 232,938 Income before equity in earnings of 50%-owned company and income taxes 19,552 12,532 Equity in earnings of 50%-owned company 1,641 1,401 Income before income taxes 21,193 13,933 Income taxes: Federal 7,418 4,458 State 1,271 1,101 ---------- ---------- 8,689 5,559 ---------- ---------- Net income $ 12,504 $ 8,374 ========== ========== Earnings per share - Diluted $ .66 $ .55 ========== ========== Weighted average shares outstanding - Diluted 19,062,000 15,364,000 ========== ========== Earnings per share - Basic $ .66 $ .55 ========== ========== Weighted average shares outstanding - Basic 18,866,000 15,158,000 ========== ========== Cash dividends declared $ .06 $ .02 ========== ==========
2. 5 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Income (Unaudited) (In thousands except share and per share amounts)
SIX MONTHS ENDED JUNE 30, -------------------------------- 1998 1997 ---------- ---------- Net sales $ 641,652 $ 445,415 Gain on sale of real estate -- 1,008 Other income 1,808 999 ---------- ---------- 643,460 447,422 Costs and expenses: Cost of sales 490,112 343,376 Warehouse, delivery, selling, administrative and general 99,550 70,520 Depreciation and amortization 8,698 5,947 Interest 6,667 4,798 ---------- ---------- 605,027 424,641 Income before equity in earnings of 50%-owned company and income taxes 38,433 22,781 Equity in earnings of 50%-owned company 2,691 2,673 Income before income taxes 41,124 25,454 Income taxes: Federal 14,394 8,145 State 2,467 2,011 ---------- ---------- 16,861 10,156 ---------- ---------- Net income $ 24,263 $ 15,298 ========== ========== Earnings per share - Diluted $ 1.27 $ .99 ========== ========== Weighted average shares outstanding - Diluted 19,032,000 15,456,000 ========== ========== Earnings per share - Basic $ 1.29 $ 1.00 ========== ========== Weighted average shares outstanding - Basic 18,854,000 15,249,000 ========== ========== Cash dividends declared $ .12 $ .09 ========== ==========
3. 6 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Cash Flows (Unaudited) (In thousands)
SIX MONTHS ENDED JUNE 30, -------------------------------- 1998 1997 ---------- ---------- OPERATING ACTIVITIES Net income $ 24,263 $ 15,298 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,698 5,947 Deferred income taxes (64) (110) (Gain) loss on sales of machinery and equipment (192) 50 Gain on sale of real estate -- (1,008) Equity in earnings of 50%-owned company (2,435) (2,464) Changes in operating assets and liabilities: Accounts receivable (10,116) (22,170) Inventories (10,250) (1,116) Prepaid expenses and other assets (87) 738 Accounts payable and accrued expenses (7,336) 8,511 ---------- ---------- Net cash provided by operating activities 2,451 3,676 ---------- ---------- INVESTMENT ACTIVITIES Purchases of property, plant and equipment (11,876) (7,623) Proceeds from sales of property and equipment 350 123 Acquisitions of metals service centers (51,252) (46,266) Dividends received from 50%-owned company 500 1,217 ---------- ---------- Net cash used in investing activities (62,278) (52,549) ---------- ---------- FINANCING ACTIVITIES Proceeds from borrowings 68,000 155,000 Principal payments on long-term debt and short-term borrowings (40,543) (97,410) Dividends paid (2,263) (1,415) Issuance of common stock 586 679 Repurchase of common stock -- (7,433) ---------- ---------- Net cash provided by financing activities 25,780 49,421 ---------- ---------- (Decrease) increase in cash (34,018) 548 Cash and cash equivalents at beginning of period 34,047 815 ---------- ---------- Cash and cash equivalents at end of period $ 29 $ 1,363 ========== ========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid during the period $ 6,289 $ 5,780 Income taxes paid during the period $ 18,325 $ 10,840
4. 7 RELIANCE STEEL & ALUMINUM CO. Notes to Consolidated Financial Statements (Unaudited) June 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation, with respect to the interim financial statements have been included. The results of operations for the three month and six month periods ended June 30, 1998 are not necessarily indicative of the results for the full year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1997, included in the Reliance Steel & Aluminum Co. Form 10-K. In April 1998, the Company effected a short-form merger whereby Amalco Metals, Inc. ("Amalco"), a wholly- owned subsidiary of the Company, was merged into the Company. At that time, Amalco was combined with the existing Reliance Metalcenter in Santa Clara in its new facility in Union City, California. 2. ACQUISITIONS On January 30, 1998, the Company acquired 100% of the outstanding capital stock of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix Metals"), for $21,000,000 in cash. Phoenix Metals is headquartered in Norcross (Atlanta), Georgia, with additional metals service centers in Birmingham, Alabama; Tampa, Florida; and Charlotte, North Carolina. The purchase of Phoenix Metals was funded with proceeds from the 1997 equity offering and borrowings under the Company's line of credit. Phoenix Metals' net sales for the twelve months ended February 28, 1997, were approximately $112,000,000. Also on January 30, 1998, the Company purchased the assets and business of Durrett-Sheppard Steel Company, L.L.C. and its subsidiary, Durrett-Sheppard Steel of Pennsylvania, Inc., through its newly-formed subsidiary, Durrett Sheppard Steel Co., Inc. ("DSS"), for $30,500,000 in cash. DSS is a metals service center located in Baltimore, Maryland. This purchase was funded with proceeds from the 1997 equity offering and borrowings under the Company's line of credit. Durrett-Sheppard Steel Co., L.L.C. had net sales of approximately $47,000,000 for the twelve months ended September 30,1997. 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 132, Employers Disclosures about Pensions and Other Post-retirement Benefits, which is effective for financial statements for periods beginning after December 15, 1997, and which revises and standardizes disclosure requirements for pensions and other post-retirement benefits. The Company will revise its disclosures as necessary upon adoption of Statement 132. Additionally, in March 1998, Statement of Position (SOP) 98-1 was issued, which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires capitalization and amortization of qualified computer software costs over its estimated useful life. There will be no impact on the Company's earnings or financial position due to the adoption of SOP 98-1. In June1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1998. Because of the Company's minimal use of derivatives there will be no impact on the Company's earnings or financial position due to the adoption of Statement 133. 5. 8 RELIANCE STEEL & ALUMINUM CO. Notes to Consolidated Financial Statements (Unaudited) - (continued) 4. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ Revolving line of credit ($200,000 limit) due October 22, 2002, interest at variable rates........................... $ 62,000 $ -- Senior unsecured notes due January 2, 2002 to January 2, 2009, average interest rate 7.12%.......................... 140,000 140,000 Variable Rate Demand Industrial Development Revenue Bonds, Series 1989 A, due July 1, 2014, with interest payable quarterly.......................................... 3,450 3,450 ---------- -------- 205,450 143,450 Less amounts due within one year............................. (100) (100) -------- -------- $205,350 $143,350 ======== ========
In October 1997, the Company entered into a syndicated credit agreement with five banks. This syndicated credit facility replaced the Company's existing revolving line of credit, increasing the Company's borrowing limit to $200,000,000. In October 1997, the Company also entered into a credit agreement that allows the Company to issue and have outstanding up to $10,000,000 of letters of credit. In September 1997 and November 1996, the Company entered into agreements with insurance companies for private placements of debt in the aggregated amounts of $65,000,000 and $75,000,000, respectively. The Company's long-term loan agreements require the maintenance of a minimum net worth and include certain restrictions on the amount of cash dividends payable, among other things. 5. SHAREHOLDERS' EQUITY In May 1998, the Company amended its Articles of Incorporation to increase the number of authorized shares from 20,000,000 to 100,000,000. Additionally in May 1998, the shareholders approved the adoption of a Directors Stock Option Plan for non-employee directors. 200,000 shares have been reserved for issuance under the Directors Stock Option Plan. Options to acquire 5,000 shares, with an exercise price at fair market value at the date of grant, were granted to each non-employee member effective with the approval of the plan. In March 1998, 5,685 shares of Common Stock were issued to division managers and officers of the Company under the 1997 Key-Man Incentive Plan. In November 1997, the Company issued 3,595,000 new shares of its Common Stock at an offering price of $27.625 per share in a secondary public offering. The proceeds of $93,908,000 (net of underwriter commissions and offering costs) were used to pay down bank debt, to fund the acquisition of Georgia Steel, and to fund a portion of the acquisitions of DSS and Phoenix Metals. In December 1994, the Board of Directors approved a Stock Repurchase Plan, authorizing the Company to purchase up to 750,000 shares (increased to 1,500,000 shares in February 1995) of its Common Stock from time to time in the open market or in privately-negotiated transactions. Repurchased shares are redeemed and treated as authorized but unissued shares. As of June 30, 1998, the Company had repurchased a total of 1,350,750 shares of its Common 6. 9 RELIANCE STEEL & ALUMINUM CO. Notes to Consolidated Financial Statements (Unaudited) - (continued) Stock under the Stock Repurchase Plan, at an average cost of $11.37 per share. No shares were repurchased by the Company during the six month period ended June 30, 1998. 6. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All weighted shares and per share amounts have been adjusted for the 3-for-2 common stock split that occurred in June 1997. 7. EMPLOYEE BENEFITS Effective April 1, 1998, substantially all 401(k) and profit sharing plans of the Company and its subsidiaries were combined into one master plan. This master plan will continue to allow each subsidiary's Board of Directors to determine independently the annual matching percentage and maximum compensation limit or annual profit sharing contribution. Eligibility will continue in accordance with each subsidiary's previous plan, and vesting is based on prior service. Eligibility occurs after three months of service, and the Company contribution vests at 25% per year, commencing one year after the employee enters the plan. 8. SUBSEQUENT EVENTS Effective July 1, 1998, the Company acquired 100% of the stock of Chatham Steel Corp. ("Chatham"), a privately-held metals service center headquartered in Savannah, Georgia for $68,000,000 in cash. Chatham has additional facilities in Columbia, South Carolina; Durham, North Carolina; Orlando, Florida; Jacksonville, Florida; and Birmingham, Alabama. The purchase of Chatham was funded with borrowings under the Company's line of credit. Chatham's net sales for the year ended December 31, 1997, were approximately $166,000,000. Additionally, effective July 1, 1998, MetalCenter, Inc. ("MetalCenter"), a wholly-owned subsidiary of the Company, was merged into the Company through a short-form merger. MetalCenter will operate as a Reliance division. 7. 10 RELIANCE STEEL & ALUMINUM CO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain income statement data for the three month and six month periods ended June 30, 1998 and June 30, 1997 (dollars are shown in thousands and certain amounts may not calculate due to rounding):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------------------- ----------------------------------------- 1998 1997 1998 1997 ----------------------------------------- ----------------------------------------- % OF % OF % OF % OF $ NET SALES $ NET SALES $ NET SALES $ NET SALES -------- --------- -------- --------- -------- --------- -------- --------- NET SALES...................... $326,184 100.0% $243,824 100.0% $641,652 100.0% $445,415 100.0% GROSS PROFIT................... 77,794 23.8 55,902 22.9 151,540 23.6 102,039 22.9 OPERATING EXPENSES............. 55,625 17.1 42,154 17.3 108,248 16.9 76,467 17.2 -------- ------- -------- ------- -------- -------- --------- ------- INCOME FROM OPERATIONS......... $ 22,169 6.8% $ 13,748 5.6% $ 43,292 6.7% $ 25,572 5.7% ======== ======= ======== ======= ======== ======== ========= ======= FIFO INCOME FROM OPERATIONS.... $ 21,442 6.6% $ 15,987 6.6% $ 44,167 6.9% $ 27,811 6.2% ======== ======= ======== ======= ======== ======== ========= =======
Substantially all inventories of the Company have been stated on the last-in, first-out ("LIFO") method. The Company uses the LIFO method of inventory valuation for these inventories because it results in a better matching of costs and revenues. Under the LIFO method, the effect of suppliers' price increases or decreases is reflected directly in the cost of goods sold. During periods of increasing prices, LIFO accounting will cause reported income to be lower than would otherwise result from the use of the first-in, first-out ("FIFO") method of inventory valuation. The table above includes income from operations and the discussions that follow include analysis as if the Company used the FIFO method. This information is for supplementary purposes only in order to facilitate a comparison of the Company's results of operations with those of other similar companies who use the FIFO method. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) Consolidated net sales increased $82,360, or 33.8%, for the three months ended June 30, 1998, compared to the same period of 1997, which reflects an increase of 29.9% in tons sold and an increase in the average sales price per ton of 2.7%. The increase in tons sold during the 1998 period was primarily due to the inclusion of the sales of AMI Metals, Inc. ("AMI"), acquired April 2, 1997; Amalco Metals, Inc. ("Amalco"), acquired April 30, 1997; Service Steel Aerospace Corp. ("SSA"), acquired October 1, 1997; Georgia Steel Supply Company ("Georgia Steel"), acquired December 1, 1997; Phoenix Corporation ("Phoenix Metals"), acquired January 30, 1998; and Durrett Sheppard Steel Co., Inc. ("DSS"), acquired January 30, 1998 (collectively, the "Acquisitions"). The average selling prices increased for the 1998 period due mainly to the change in product mix from the 1997 period resulting from the inclusion in 1998 of the net sales of SSA and Phoenix Metals, along with increased sales volume at AMI. These operations primarily sell non-ferrous products, which generally have higher prices than most other products sold by the Company. During the 1997 period, the product mix was more heavily weighted toward carbon steel products, which generally have lower selling prices than non-ferrous products. Excluding the Acquisitions, the Company reported an increase of 1.8% in tons sold, which is primarily due to general economic improvements and an increased market share in the Company's market areas. However, on a same-store basis the average selling price per ton decreased by 1.8% during the 1998 period, which is primarily due to a slight decline in the selling prices of most of the Company's products, which resulted from lower costs of these products. 8. 11 Total gross profit increased $21,892, or 39.2%, in the three months ended June 30, 1998, compared to the three months ended June 30, 1997. Expressed as a percentage of sales, gross profit increased from 22.9% in 1997 to 23.9% in 1998. The improvement was primarily due to a decrease in LIFO costs of $727 in the 1998 period, which resulted primarily from decreased costs of most of the Company's aluminum products, as compared to increased LIFO costs of $2,239 during the corresponding 1997 period. On a FIFO basis, gross profit was consistent at 23.6% of sales for the three month period ended June 30, 1998, compared to 23.8% for the three months ended June 30, 1997. Warehouse, delivery, selling and general and administrative ("G&A") expenses increased $12,107, or 31.1%, in the three month period ended June 30, 1998 compared to the corresponding period of 1997 and amounted to 15.6% and 16.0% of sales, respectively. The dollar increase in expenses reflects the increase in sales volume for the 1998 period, which includes the sales and related expenses of the Acquisitions. The decrease in G&A expenses as a percentage of sales was primarily due to increased sales volume at certain of the acquired companies, with only a minor increase in G&A expense levels, and historically lower G&A expenses as a percentage of sales for certain companies acquired since the 1997 period. Depreciation and amortization expense increased 42.0% during the three months ended June 30, 1998, compared to the corresponding period of 1997. This increase is primarily due to the inclusion of depreciation expense related to the assets of the Acquisitions, along with the amortization of goodwill resulting from the Acquisitions. Interest expense increased by 16.0% due to increased borrowings during the three months ended June 30, 1998, as compared to the corresponding period of 1997, to fund the Acquisitions. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) Consolidated net sales increased $196,237, or 44.1%, for the six months ended June 30, 1998, compared to the same period of 1997. This increase in sales reflects an increase of 29.3% in tons sold and an increase in the average sales price per ton of 11.3%. The increase in tons sold was primarily due to the inclusion of the sales of the Acquisitions during the six month period ended June 30, 1998. The average selling prices increased for the 1998 period due mainly to the change in product mix from the 1997 period, as the product mix shifted toward higher sales of non-ferrous products. Non-ferrous products generally have higher prices than most other products sold by the Company, including carbon steel products, which represented a larger portion of the Company's sales during the 1997 period. This shift in product mix resulted from the inclusion in 1998 of the net sales of AMI, Amalco, SSA and Phoenix Metals, which primarily sell non-ferrous products. Excluding the Acquisitions, the Company reported an increase of 2.8% in tons sold, and a decrease in the average selling price per ton of 1.0%. The increase in tons sold is primarily due to general economic improvements and an increased market share in the Company's market areas. The decrease in the average selling price per ton for the 1998 period compared to the 1997 period resulted primarily due to lower selling prices of most of the Company's products in the 1998 period. Total gross profit increased $49,501, or 48.5%, in the six months ended June 30, 1998, compared to the six months ended June 30, 1997. Expressed as a percentage of sales, gross profit increased from 22.9% in 1997 to 23.6% in 1998. The slight improvement was primarily due to the shift in product mix to higher margin products, resulting primarily from the inclusion of the sales of products sold by AMI, Amalco, SSA and DSS during the 1998 period, and due to the change in LIFO costs. During the 1998 period, LIFO costs of $875 were recorded, which resulted primarily from increased costs of heat treated aluminum products, which have begun to level off, and were offset by declining costs of most of the Company's other products, as compared to LIFO costs of $2,239 during the 1997 period. On a FIFO basis, gross profit increased slightly to 23.8% of sales for the six month period ended June 30, 1998, from 23.4% for the six months ended June 30, 1997, primarily due to the shift in product mix. 9. 12 Warehouse, delivery, selling and general and administrative ("G&A") expenses increased $29,030, or 41.2%, in the six month period ended June 30, 1998, compared to the corresponding period of 1997 and amounted to 15.5% and 15.8% of sales, respectively. The dollar increase in expenses reflects the increase in sales volume for the 1998 period, which includes the sales and related expenses of the Acquisitions. Depreciation and amortization expense increased 46.3% during the six months ended June 30, 1998, compared to the corresponding period of 1997. This increase is primarily due to the inclusion of depreciation expense related to the assets of the Acquisitions, along with the amortization of goodwill resulting from the Acquisitions. Interest expense increased by $1,869 due to increased borrowings during the six months ended June 30, 1998, as compared to the corresponding period of 1997, to fund the Acquisitions. LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) At June 30, 1998, working capital amounted to $231,912 compared to $213,252 at December 31, 1997. The slight increase was primarily due to the working capital of companies acquired in 1998, and increases in accounts receivable and inventory resulting from higher sales levels in the first half of 1998. The Company's capital requirements are primarily for working capital, acquisitions, and capital expenditures for continued improvements in plant capacities and material handling and processing equipment. The Company's primary sources of liquidity are from internally generated funds from operations and the Company's revolving line of credit. On October 22, 1997, the Company entered into a syndicated credit facility with five banks. The Company's borrowing limit under the revolving line of credit established under this agreement was increased to $200,000. The syndicated credit agreement allows the Company to use up to $175,000 of the line of credit to make acquisitions. In September 1997 and in November 1996, the Company entered into agreements with insurance companies for private placements of debt in the aggregate amounts of $65,000 and $75,000, respectively. The proceeds of the debt were used to fund acquisitions, for general working capital purposes, and to reduce the borrowings under the Company's revolving credit facility. The senior notes that were issued in the private placements have maturity dates ranging from 2002 to 2009 and bear interest at rates ranging from 6.76% to 7.37% per annum. Cash provided by operations decreased slightly during the six month period ended June 30, 1998, as compared to the corresponding 1997 period, primarily due to working capital requirements to support the increased sales volume. Net capital expenditures, excluding acquisitions, were $11,876 for the six months ended June 30, 1998, with the increased expenditures primarily relating to the new facility in Union City, California. The Company had no material commitments for capital expenditures as of June 30, 1998. The Company is currently in discussions with its lenders to increase its debt capacity. The Company anticipates that funds generated from operations and funds available under its line of credit will be sufficient to meet its working capital needs for the foreseeable future, and the expansion of its facilities at certain of its metals service centers currently in progress. Additional financing would be needed to acquire additional companies. In November 1997, the Company issued 3,595,000 new shares of its Common Stock in a public equity offering, resulting in net proceeds of $93,908. The proceeds from this offering were used to pay down outstanding bank debt, including the debt incurred to fund acquisitions. At December 31, 1997, the balance of the proceeds was invested in high quality short-term investments (classified as cash equivalents), which, along with bank debt, was then used to fund the acquisitions of DSS and Phoenix Metals on January 30, 1998. In May 1998, the Company increased the number of authorized shares outstanding of its common stock from 20,000,000 to 100,000,000 shares. This increase allows the Company to fund future acquisitions with stock, if desired, and also allows the Company to raise capital in the public market, if desired. 10. 13 SEASONALITY The Company recognizes that some of its customers may be in seasonal businesses, especially customers in the construction industry. As a result of the Company's geographic, product and customer diversity, however, the Company's operations have not shown any material seasonal trends, although the months of November and December traditionally have been less profitable because of a reduced number of working days for shipments of the Company's products and holiday closures for some of its customers. There can be no assurance that period-to-period fluctuations will not occur in the future. Results of any one or more quarters are therefore not necessarily indicative of annual results. IMPACT OF YEAR 2000 The Company does not anticipate that there would be a material impact on the results of operations or cash flows of the Company related to the Year 2000 Issue. The Year 2000 Issue addresses computer programs which have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. Most of the Company's locations are converting to a new computer system that has been certified Year 2000 compliant by the Company's software vendor. In addition to the vendor's certification, the Company has an ongoing program to test its systems for such compliance. This conversion began in 1994 and has been progressing on schedule. The final conversions are scheduled to occur in June 1999, which is prior to any anticipated impact on its operating systems. A training staff was hired in 1996 and has been solely dedicated to this conversion project. At the Company's locations that are not being converted to this system, assessments of the existing systems have occurred. The Company, working with its respective software vendors, has adopted plans to make the minor modifications required to address the Year 2000 Issue at these locations. Management believes that the major business systems of the Company are not vulnerable to third parties' failure to remediate their own Year 2000 Issues, as the Company's interface with third parties, including customers and vendors, does not involve heavily automated computer dependent communications. The Company believes that, with the conversions to new software and modifications to existing software, the Year 2000 Issue will not pose significant operational problems for its computer system. In the event the remaining conversions and modifications are not made, or are not completed timely, the Year 2000 Issue is not expected to have a material impact on the operations of the Company, as the products sold by the Company and the processing and delivery equipment used are not date dependent, minimizing the impact of any Year 2000 Issues related to meeting customer requirements. As the Company has been incurring costs related to this project since 1994 and no significant additional costs have been identified, the Company does not anticipate a material impact on the results of operations or cash flows related to the Year 2000 Issue. 11. 14 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES. (a) Not applicable. (b) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. (a) Not applicable. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of Reliance Steel & Aluminum Co. shareholders was held on May 20, 1998. (b) [Need not be answered because (1) proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Act of 1934, (2) there was no solicitation in opposition to management's nominees as listed in the proxy statement, and (3) all such nominees were elected.] (c) The following is a brief description of matters voted upon at the meeting: Four directors were elected at the annual meeting. Joe D. Crider: 16,109,435 shares were voted for election and 379,601 shares were withheld. David H. Hannah: 16,109,585 shares were voted for election and 379,451 shares were withheld. Gregg J. Mollins: 16,104,755 shares were voted for election and 384,281 shares were withheld. William I. Rumer: 16,187,777 shares were voted for election and 301,259 shares were withheld. The Board of Directors proposed an increase in the number of authorized shares of Common Stock to 100,000,000, subject to approval by the shareholders. The increase was approved: 14,177,945 shares were voted for the proposal, 2,279,588 shares were voted against it, and 31,503 shares abstained. The Board of Directors proposed a Directors Stock Option Plan, subject to approval of the shareholders. The plan was approved: 15,126,483 shares were voted for the proposal, 1,062,385, shares were voted against it, and 300,168 shares abstained. The Board of Directors selected Ernst & Young as independent auditors to audit the financial statements of the Company and its subsidiaries for 1998, subject to ratification by the shareholders. The selection was approved: 16,461,684 shares were voted for the proposal, 9,689, shares were voted against it, and 17,633 shares abstained. ITEM 5. OTHER INFORMATION. Not applicable. 12. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Form 8-K None 13. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RELIANCE STEEL & ALUMINUM CO. Dated: August 14, 1998 By: /s/ David H. Hannah ---------------------------------- David H. Hannah President By: /s/ Steven S. Weis ---------------------------------- Steven S. Weis Senior Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 29 0 154,135 (5,396) 198,105 358,099 256,897 (71,685) 686,744 126,187 0 0 0 155,347 181,394 686,744 326,184 326,887 248,390 248,390 55,624 0 3,321 21,193 8,689 12,504 0 0 0 12,504 .66 .66
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