-----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, BpsFGOHMKyMT/jS7LVCf99TTnd8WUTlF0dx/8aXmdc0xUOA3vJ3mW/9ptmqDj5MO W4uTgQJXbPmDfmslhW0g2w== 0000950150-99-001237.txt : 19991117 0000950150-99-001237.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950150-99-001237 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751773 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 SEPTEMBER 30, 1999 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ------------------- Commission file number: 001-13122 RELIANCE STEEL & ALUMINUM CO. ----------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-1142616 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2550 East 25th Street Los Angeles, California 90058 (323) 582-2272 ------------------------------------------------------------ (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 31, 1999 27,787,226 shares of the registrant's common stock, no par value, were outstanding. 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 .............................................................. 13 SIGNATURES ................................................................................ 14
i 3 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q may include forward-looking statements that involve risks and uncertainties. Reliance Steel & Aluminum Co. ("the Company") is subject to risks inherent in the industries which the Company serves, such as, the volatility of the transportation, construction, general manufacturing, aerospace and semiconductor fabrication industries to which the Company sells products. These industries, and therefore the Company, are subject to changes in the economy in general. The Company has increased its long-term debt as a result of its recent acquisitions and is subject to increased risks as a result of this higher leverage. The Company's metals service centers are subject to fluctuations in the price of raw materials, although the Company is generally able to pass-through increases in costs of raw materials to its customers. The Company's relationship to and business dealings with significant vendors and customers and the intense price competition in the Company's markets also may affect the Company's results. Recent acquisitions of the Company may not perform as the Company anticipates after the change in ownership. Accordingly, the actual results realized by the Company could differ materially from the statements made herein. You should not rely on the forward-looking statements made in this Form 10-Q. ii 4 PART I -- FINANCIAL INFORMATION RELIANCE STEEL & ALUMINUM CO. Consolidated Balance Sheets (In thousands except share amounts)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 10,790 $ 6,496 Accounts receivable, less allowance for doubtful accounts of $6,686 at September 1999 and $5,816 at December 1998 179,346 156,150 Inventories 212,972 240,697 Prepaid expenses and other current assets 1,490 4,071 Deferred income taxes 13,911 12,899 --------- --------- Total current assets 418,509 420,313 Property, plant and equipment, at cost: Land 31,382 31,202 Buildings 131,646 125,051 Machinery and equipment 152,722 137,841 Allowances for depreciation (94,215) (81,013) --------- --------- 221,535 213,081 Investment in 50%-owned company 19,528 24,942 Goodwill, net of accumulated amortization of $11,495 at September 1999 and $7,161 at December 1998 221,508 176,949 Other assets 11,681 6,110 --------- --------- Total assets $ 892,761 $ 841,395 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 90,828 $ 91,615 Accrued expenses 26,885 17,768 Wages and related accruals 12,831 10,010 Deferred income taxes 9,650 9,650 Current maturities of long-term debt 150 100 --------- --------- Total current liabilities 140,344 129,143 Long-term debt 343,050 343,250 Deferred income taxes 23,200 23,200 Shareholders' equity: Preferred stock, no par value: Authorized shares - 5,000,000 None issued or outstanding -- -- Common stock, no par value: Authorized shares - 100,000,000 Issued and outstanding shares - 27,787,226 at September 1999 and 27,674,703 at December 1998, stated capital 153,000 151,903 Retained earnings 233,167 193,899 --------- --------- Total shareholders' equity 386,167 345,802 --------- --------- Total liabilities and shareholders' equity $ 892,761 $ 841,395 ========= =========
See Notes to Consolidated Financial Statements. NOTE: The Balance Sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 1. 5 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Income (Unaudited) (In thousands except share and per share amounts)
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 ----------- ------------ Net sales $ 380,070 $ 357,819 Other income 1,095 747 ----------- ----------- 381,165 358,566 Costs and expenses: Cost of sales 275,320 271,486 Warehouse, delivery, selling, administrative and general 70,317 57,754 Depreciation and amortization 6,613 5,497 Interest 5,699 5,017 ----------- ----------- 357,949 339,754 Income before equity in earnings of 50%-owned company and income taxes 23,216 18,812 Equity in earnings of 50%-owned company 1,173 1,423 ----------- ----------- Income before income taxes 24,389 20,235 Income taxes: Federal 8,268 7,082 State 1,366 1,215 ----------- ----------- 9,634 8,297 ----------- ----------- Net income $ 14,755 $ 11,938 =========== =========== Earnings per share - diluted $ .53 $ .42 =========== =========== Weighted average shares outstanding - diluted 27,953,000 28,541,000 =========== =========== Earnings per share - basic $ .53 $ .42 =========== =========== Weighted average shares outstanding - basic 27,779,000 28,304,000 =========== =========== Cash dividends per share $ .04 $ .04 =========== ===========
2. 6 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Income (Unaudited) (In thousands except share and per share amounts)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 ----------- ----------- Net sales $ 1,136,668 $ 999,471 Gain from SERP benefit 2,341 -- Other income 2,912 2,555 ----------- ----------- 1,141,921 1,002,026 Costs and expenses: Cost of sales 836,305 761,598 Warehouse, delivery, selling, administrative and general 201,963 157,304 Depreciation and amortization 19,054 14,195 Interest 17,609 11,684 ----------- ----------- 1,074,931 944,781 Income before equity in earnings of 50%-owned company and income taxes 66,990 57,245 Equity in earnings of 50%-owned company 3,208 4,114 ----------- ----------- Income before income taxes 70,198 61,359 Income taxes: Federal 23,797 21,476 State 3,931 3,682 ----------- ----------- 27,728 25,158 ----------- ----------- Net income $ 42,470 $ 36,201 =========== =========== Earnings per share - diluted $ 1.52 $ 1.27 =========== =========== Per share gain from SERP benefit - diluted $ .05 $ .00 =========== =========== Weighted average shares outstanding - diluted 27,879,000 28,547,000 =========== =========== Earnings per share - basic $ 1.53 $ 1.28 =========== =========== Weighted average shares outstanding - basic 27,733,000 28,289,000 =========== =========== Cash dividends per share $ .13 $ .12 =========== ===========
3. 7 RELIANCE STEEL & ALUMINUM CO. Consolidated Statements of Cash Flows (Unaudited) (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES Net income $ 42,470 $ 36,201 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,054 14,195 Gain from SERP benefit (2,341) -- Deferred income taxes (13) 64 Loss (gain) on sales of machinery and equipment 113 (223) Equity in earnings of 50%-owned company (3,208) (3,719) Changes in operating assets and liabilities: Accounts receivable (3,829) (3,467) Inventories 51,743 (15,965) Prepaid expenses and other assets (2,561) 679 Accounts payable and accrued expenses (238) (17,935) --------- --------- Net cash provided by operating activities 101,190 9,830 --------- --------- INVESTMENT ACTIVITIES Purchases of property, plant and equipment (15,389) (17,258) Proceeds from sales of property and equipment 1,386 460 Acquisitions of metals service centers, net of cash acquired, and asset purchases of metals service centers (85,370) (137,436) Dividends received from 50%-owned company 8,622 500 --------- --------- Net cash used in investing activities (90,751) (153,734) --------- --------- FINANCING ACTIVITIES Proceeds from borrowings 70,500 193,000 Principal payments on long-term debt and short-term borrowings (74,541) (75,733) Dividends paid (3,605) (3,395) Issuance of common stock 1,501 586 --------- --------- Net cash (used in) provided by financing activities (6,145) 114,458 --------- --------- Increase (decrease) in cash 4,294 (29,446) Cash and cash equivalents at beginning of period 6,496 34,047 --------- --------- Cash and cash equivalents at end of period $ 10,790 $ 4,601 ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Interest paid during the period $ 12,465 $ 7,243 Income taxes paid during the period 29,568 23,168
4. 8 RELIANCE STEEL & ALUMINUM CO. Notes to Consolidated Financial Statements (Unaudited) September 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation, with respect to the interim financial statements have been included. The results of operations for the three month and nine month periods ended September 30, 1999 are not necessarily indicative of the results for the full year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998, included in the Reliance Steel & Aluminum Co. Form 10-K. 2. ACQUISITIONS On September 3, 1999, the Company acquired 100% of the stock of Allegheny Steel Distributors, Inc. ("Allegheny"), a privately-held metals service center. Allegheny is based in Indianola (Pittsburgh), Pennsylvania and specializes in cutting-to-length and blanking primarily carbon steel flat-rolled products. Allegheny had sales of approximately $31,000,000 in the year ended December 31, 1998. Allegheny operates as a wholly-owned subsidiary of the Company. Allegheny was acquired with funds from borrowings under the Company's syndicated credit facility. On March 1, 1999, the Company acquired 100% of the outstanding shares of Liebovich Bros., Inc. ("LBI"), for approximately $60,000,000 in cash. LBI was a privately-held metals service center company with one full-line metals service center and two metals fabrication facilities in Rockford, Illinois, and a metals service center in Wyoming (Grand Rapids), Michigan. LBI reported sales of approximately $130,000,000 for the twelve months ended December 31, 1998. LBI operates as a wholly-owned subsidiary of the Company. The purchase of LBI was funded with cash generated from operations and borrowings on the Company's syndicated credit facility. The Allegheny and LBI transactions have been accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated statements of income include the revenues and expenses of Allegheny and LBI since their respective closing dates. The financial statements reflect the preliminary allocations of the purchase price. The allocations of purchase price were based upon the preliminary fair values of the net assets purchased. In February 1999, Valex Corp., a 97%-owned subsidiary of the Company, acquired certain assets of Advanced MicroFinish, Inc., which was a privately-held manufacturer of electropolished tubing and fittings. The assets and business of Advanced MicroFinish, Inc. were moved to Valex's headquarters and manufacturing facility in Ventura, California. 5. 9 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (IN THOUSANDS) Revolving line of credit ($200,000 limit) due October 22, 2002, interest at variable rates, weighted average rate of 5.4% during the nine months ended September 30, 1999.................... $ 50,000 $ 50,000 Senior unsecured notes due January 2, 2004 to January 2, 2009, average interest rate 7.22%....... 75,000 75,000 Senior unsecured notes due January 2, 2002 to January 2, 2008, average interest rate 7.02%....... 65,000 65,000 Senior unsecured notes due October 15, 2005 to October 15, 2010, average interest rate 6.55%...... 150,000 150,000 Variable Rate Demand Industrial Development Revenue Bonds, Series 1989 A, due July 1, 2014, with interest payable quarterly, average rate of 2.9% during the nine months ended September 30, 1999................................. 3,200 3,350 -------- --------- 343,200 343,350 Less amounts due within one year................... (150) (100) -------- --------- $343,050 $ 343,250 ======== =========
During 1998, the Company issued $150,000,000 of senior unsecured notes in a private placement of debt. The proceeds were funded on November 3, 1998, and were used to pay off bank debt incurred in connection with acquisitions. In October 1997, the Company entered into a syndicated credit agreement with five banks which increased the Company's borrowing limit on its unsecured revolving line of credit to $200,000,000. In October 1997, the Company also entered into a credit agreement that allows it to issue and have outstanding up to $10,000,000 in letters of credit. The Company's long-term loan agreements require the maintenance of a minimum net worth and include certain restrictions on the amount of cash dividends payable, among other things. 4. GAIN FROM SERP BENEFIT The Company recorded a one-time net gain of $2,341,000 due to life insurance proceeds related to the death of one of its executives in January 1999. The Company funds its Supplemental Executive Retirement Plan ("SERP") through the use of life insurance policies. This gain is net of the death benefit to be received by the deceased executive's beneficiary, under the terms of the SERP. The insurance proceeds are not taxable to the Company and, therefore, the Company's effective tax rate decreased due to the annualized effect of this non-taxable gain. 6. 10 5. SHAREHOLDERS' EQUITY In August 1998, the Board of Directors approved the purchase of up to an additional 3,750,000 shares of the Company's outstanding Common Stock through its Stock Repurchase Plan, for a total of up to 6,000,000 shares. The Stock Repurchase Plan was initially established in December 1994 and authorizes the Company to purchase shares of its Common Stock from time to time in the open market or in privately-negotiated transactions. Repurchased shares are redeemed and treated as authorized but unissued shares. As of September 30, 1999, the Company had repurchased a total of 2,672,325 shares of its Common Stock under the Stock Repurchase Plan, at an average cost of $9.91 per share. No shares were repurchased by the Company during the nine month period ended September 30, 1999. In March 1999, 10,836 shares of Common Stock were issued to division managers and officers of the Company under the 1998 Key-Man Incentive Plan. 6. STOCK SPLIT On July 28, 1999, the Board of Directors declared a 3:2 stock split in the form of a 50% stock dividend on the Company's Common Stock, payable September 24, 1999 to shareholders of record September 2, 1999. All share and per share data, as appropriate, reflect this split. 7. SUBSEQUENT EVENTS On October 1, 1999, the Company purchased the assets and business of Arrow Metals, a division of Arrow Smelters, Inc. The privately-held metals service center business was based in Garland (Dallas), Texas, with additional facilities in Houston and San Antonio. Arrow Metals specializes in non-ferrous metals processing and distribution of mainly aluminum plate and bar products, with 1998 sales of approximately $22,000,000. The Arrow Metals locations are operating as divisions of the Company. 7. 11 RELIANCE STEEL & ALUMINUM CO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain income statement data for the three month and nine month periods ended September 30, 1999 and September 30, 1998 (dollars are shown in thousands and certain amounts may not calculate due to rounding):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------- ------------------- ---------------------- --------------------- 1999 1998 1999 1998 -------------------- ------------------- ---------------------- --------------------- % OF % OF % OF % OF $ NET SALES $ NET SALES $ NET SALES $ NET SALES -------- --------- -------- --------- ---------- --------- -------- --------- NET SALES................. $380,070 100.0% $357,819 100.0% $1,136,668 100.0% $999,471 100.0% GROSS PROFIT.............. 104,750 27.6 86,333 24.1 300,363 26.4 237,873 23.8 OPERATING EXPENSES........ 70,317 18.5 57,754 16.1 201,963 17.8 157,304 15.7 DEPRECIATION.............. 4,923 1.3 4,480 1.3 14,077 1.2 11,304 1.1 -------- ------ -------- ----- ---------- ----- -------- ----- INCOME FROM OPERATIONS.... $ 29,510 7.8% $ 24,099 6.7% $ 84,323 7.4% $ 69.625 $ 6.9% ======== ====== ======== ===== ========== ===== ======== =====
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) Consolidated net sales increased $22,251, or 6.2%, for the three months ended September 30, 1999 compared to the same three months of 1998, which reflects an increase of 25.0% in tons sold and a decrease in the average sales price per ton of 14.4%. The increase in tons sold was primarily due to the inclusion of a full three months of the sales of Lusk Metals, acquired September 18, 1998; and the sales of American Metals Corporation ("American Metals"), acquired October 1, 1998; Steel Bar Corporation ("Steel Bar"), acquired October 1, 1998; Engbar Pipe & Steel Co. ("Engbar"), acquired October 5, 1998; Liebovich Bros., Inc. ("LBI"), acquired March 1, 1999; and Allegheny Steel Distributors, Inc. ("Allegheny"), acquired September 1, 1999 (collectively, the "Acquisitions") during the three month period ended September 30, 1999. However, the increase from the Acquisitions was offset, in part, by a decline in sales to the aerospace industry during the 1999 period, as compared to the 1998 period. The average selling prices decreased for the 1999 period due mainly to lower costs of materials and the change in product mix from the same three month period of 1998. The change in product mix resulted primarily from inclusion in 1999 of the net sales of the Acquisitions, which, except for Lusk Metals, primarily sell carbon steel products, which generally have lower prices than non-ferrous products. In addition, the decline in sales to the aerospace industry contributed to the decreased prices, as the products sold to this market generally have higher selling prices than most other products sold by the Company. Excluding the Acquisitions, the Company reported an increase of 1.9% in tons sold, with the average selling price per ton decreasing 12.6%. The increase in tons sold was due to general overall improvement in the market areas served by the Company, with the exception of the aerospace market. The decrease in average selling price is primarily due to lower costs of most of the Company's products during the 1999 period, as compared to the 1998 period. Both sales volume and pricing to the aerospace industry have decreased in the 1999 period as compared to the same period of 1998. Total gross profit increased $18,417, or 21.3%, in the three months ended September 30, 1999 compared to the same three months of 1998, primarily due to the inclusion of the gross profit of the Acquisitions. Expressed as a percentage of sales, gross profit increased from 24.1% in 1998 to 27.6% in 1999. The improvement as a percentage of sales was primarily due to certain of the companies comprising the Acquisitions achieving higher gross profit margins than the Company has historically achieved on a consolidated basis. Also lending to the improvement were 8. 12 increased margins at most of the Company's locations in the 1999 period as compared to the 1998 period. This resulted mainly from lower costs of materials for most of the Company's products coupled with the Company's efforts to maintain selling prices. Warehouse, delivery, selling and general and administrative ("G&A") expenses increased $12,563, or 21.8%, in the three month period ended September 30, 1999 compared to the corresponding period of 1998 and amounted to 18.5% and 16.1% of sales, respectively. The dollar increase in expenses reflects the increase in sales volume for the 1999 period, which includes the sales and related expenses of the Acquisitions. The increase as a percent of sales is primarily due to the increased volume of products being sold at lower selling prices and due to certain of the companies comprising the Acquisitions operating at higher expense levels than the Company has historically operated at on a consolidated basis. These are the same companies that are achieving higher gross profit margins. The effective income tax rate decreased to 39.5% from 40.6% for the three month periods ended September 30, 1999 and 1998, respectively. The decreased rate is due to the annualized effect of the tax free life insurance gain recorded during the three months ended March 31, 1999. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) Consolidated net sales increased $137,197, or 13.7%, compared to the first nine months of 1998, which reflects an increase of 42.7% in tons sold and a decrease in the average sales price per ton of 20.7%. The increase in tons sold was primarily due to the inclusion of the sales of the Acquisitions and a full nine months of sales of Phoenix Corporation ("Phoenix Metals"), acquired January 30, 1998; Durrett Sheppard Steel Co., Inc. ("Durrett"), acquired January 30, 1998; and Chatham Steel Corporation ("Chatham"), acquired July 1, 1998; during the nine months ended September 30, 1999. The average selling prices decreased for the 1999 period from the first nine months of 1998 due mainly to lower costs of materials and changes in product mix. The changes in product mix resulted from the majority of the Acquisitions along with Durrett and Chatham selling primarily carbon steel products. Because carbon steel products generally have lower selling prices than non-ferrous products, selling a higher percentage of carbon steel products causes the average selling price to decline. In addition, sales of higher priced heat treated aluminum products to the aerospace industry declined in the 1999 period in both volume and price from the 1998 period. Excluding the Acquisitions, the Company reported an increase of 2.5% in tons sold, which resulted from continued strong demand in most of the market areas served by the Company, except for the aerospace market. The average selling price per ton decreased 14.9% in the 1999 period as compared to the 1998 period. The decrease in average selling price was primarily due to lower costs of most of the Company's products during the 1999 period, as compared to the 1998 period, and due to the decrease in sales to the aerospace industry discussed above. The Company recorded a one-time net gain of $2,341 from a life insurance policy, which is not taxable to the Company, in connection with the Company's Supplemental Executive Retirement Plan ("SERP") during the nine months ended September 30, 1999. The life insurance proceeds relate to the death of one of the Company's executive officers in January 1999 and are net of the amount to be paid to his beneficiary under the terms of the SERP. Total gross profit increased $62,490, or 26.3%, in the first nine months of 1999 compared to the first nine months of 1998, primarily due to the inclusion of the gross profit of the Acquisitions and a full nine months of Phoenix Metals, Durrett and Chatham. As a percentage of sales, gross profit increased to 26.4% in the 1999 year to date period, from 23.8% in the 1998 period. The gross profit margins improved primarily due to most locations of the Company realizing increased gross margin percentages in the 1999 period as compared to the 1998 period, and due to the Acquisitions. Certain companies acquired in 1999 and 1998 generally operate at higher gross margin levels than the gross margin level that has typically been attained by the Company on a consolidated level. The gross profit 9. 13 margins excluding the Acquisitions have generally improved, except for sales to the aerospace market, due to lower costs for most products sold by the Company during the 1999 period along with the Company's efforts to manage margins and provide a high level of service to its customers. Warehouse, delivery, selling and general and administrative ("G&A") expenses increased $44,659, or 28.4%, in the first nine months of 1999 compared to the corresponding period of 1998. The dollar increase in expenses reflects the increase in sales volume for the 1999 period, which includes the sales and related expenses of the Acquisitions, along with a full nine months of expenses for Phoenix Metals, Durrett and Chatham. As a percent of sales, G&A expenses amounted to 17.8% and 15.7% of sales in the 1999 and 1998 periods, respectively. This increase is primarily due to the increased volume of products being sold at lower selling prices. In addition, certain companies acquired in 1999 and 1998 operate at higher expense levels than the Company has historically operated at on a consolidated basis. The companies operating at these higher expense levels are also generating higher gross margins. Depreciation and amortization expense increased 34.2% during the nine months ended September 30, 1999 compared to the corresponding period of 1998. This increase is primarily due to the inclusion of depreciation expense related to the assets of the Acquisitions, along with the amortization of goodwill resulting from the Acquisitions. Interest expense increased $5,925 due to increased borrowings during the first nine months of 1999 as compared to the corresponding period of 1998. The additional borrowings were used to fund the Acquisitions. The effective income tax rate decreased to 39.5% for 1999, from 40.6% for the nine month period ended September 30, 1998. The decreased rate is due to the annualized effect of the tax free life insurance gain recorded during the nine months ended September 30, 1999. Earnings per diluted share of $1.52 for the nine month period ended September 30, 1999 includes $.05 related to the tax free gain on the life insurance policy discussed above. LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS) At September 30, 1999, working capital amounted to $278,165 compared to $291,170 at December 31, 1998. The decrease, which includes the additional working capital of companies acquired in 1999, was primarily due to a decrease of $51,743 in inventory (excluding the effect of the acquired inventories in 1999 of LBI and Allegheny) resulting from efforts by the Company to improve inventory turnover in the first nine months of 1999. The Company's capital requirements are primarily for working capital, acquisitions, and capital expenditures for continued improvements in plant capacities and material handling and processing equipment. The Company's primary sources of liquidity are generally from internally generated funds from operations and the Company's revolving line of credit. Additionally, in October 1998, the Company entered into agreements with insurance companies for private placements of senior unsecured notes in the aggregate amount of $150,000, which was funded in November 1998. The proceeds of the debt were used to refinance the borrowings under the Company's revolving credit facility made to fund acquisitions during 1998, and borrowings for general working capital purposes. The senior notes that were issued in the private placement have maturity dates ranging from 2005 to 2010, with an average life of 10.3 years, and bear interest at an average rate of 6.55% per annum. Cash provided by operations increased significantly during the nine month period ended September 30, 1999 as compared to the corresponding 1998 period, primarily due to inventory reductions. Due to the Company's efforts to improve inventory turns, inventory levels have declined at most of the Company's locations during the first nine months of 1999 compared to 1998. 10. 14 Net capital expenditures, excluding acquisitions, were $15,389 for the nine months ended September 30, 1999. The Company had no material commitments for capital expenditures as of September 30, 1999. The Company anticipates that funds generated from operations and funds available under its $200,000 line of credit will be sufficient to meet its working capital needs for the foreseeable future. On August 31, 1998, the Board of Directors of the Company approved the purchase of up to an additional 3,750,000 shares of the Company's outstanding Common Stock through its Stock Repurchase Plan, for a total of 6,000,000 shares. No shares were repurchased by the Company during the nine months ended September 30, 1999. The Company has purchased a total of 2,672,325 shares of its Common Stock, at an average purchase price of $9.91 per share, as of September 30, 1999, all of which are being treated as authorized but unissued shares. The Company believes such purchases enhance shareholder value and reflect its confidence in the long-term growth potential of the Company. SEASONALITY The Company recognizes that some of its customers may be in seasonal businesses, especially customers in the construction industry. As a result of the Company's geographic, product and customer diversity, however, the Company's operations have not shown any material seasonal trends, although the months of November and December traditionally have been less profitable because of a reduced number of working days for shipments of the Company's products and holiday closures by some of its customers. There can be no assurance that period-to-period fluctuations will not occur in the future. Results of any one or more quarters are therefore not necessarily indicative of annual results. IMPACT OF YEAR 2000 The Company does not anticipate that there would be a material impact on its results of operations or cash flows related to the Company's Year 2000 Issue. The Year 2000 Issue addresses computer programs which have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. As the Company's operations consist of metals service centers which do not produce a date sensitive product or have highly automated operations, the primary Year 2000 exposure is related to the business applications software used by the Company to perform purchasing, inventory management, processing, production scheduling, sales order entry and invoicing, routing and shipping, and accounts payable and general ledger accounting. A majority of the Company's locations began converting to new business applications software and related hardware systems to obtain additional functionality in 1994. This software has since been certified Year 2000 compliant by the Company's software vendor. In addition to the vendor's certification, the Company has an ongoing program to test its systems for such compliance. The testing performed by the Company has confirmed the vendor's certification. Additionally, certain of the subsidiaries acquired by the Company will be converted to this system during 1999, as their current systems are not considered to be Year 2000 compliant. All conversions, except one, have been completed. The final conversion is on schedule to be completed in November 1999. At the Company's subsidiaries that are not being converted to this system, assessments of the existing systems have occurred, which indicated that certain subsidiaries required minor modifications to their existing software. These modifications have been completed. With respect to other equipment used in the Company's operations, Year 2000 certifications are being obtained from vendors and testing is being performed, where practical. As the Company utilizes minimal date dependent processing and delivery equipment in its operations, management does not expect a material impact on the Company's operations due to the failure of other equipment in the Year 2000. The major business systems of the Company are not vulnerable to third parties' failure to remediate their own Year 2000 Issues, as the Company's interface with third parties, including customers and vendors, does not involve heavily automated computer dependent communications. The Company has estimated costs related to the Year 2000 Issue of approximately $1.5 million, with approximately $.75 million of these costs expected to be capitalized, as they relate primarily to 11. 15 purchases of software. Most of these costs have been incurred as of September 30, 1999. As such, the Company does not anticipate a material impact on the results of operations or cash flows related to the Year 2000 Issue. The Company has not obtained independent verification to assure the reliability of the Year 2000 risk and cost estimates. The Company believes that with the conversions to new software and modifications to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. In the event the remaining conversion is completed timely, or modified systems fail, the Year 2000 Issue is not expected to have a material impact on the operations of the Company, as the products sold by the Company and the processing and delivery equipment used are not date dependent, minimizing the impact of any Year 2000 Issues related to meeting customer requirements. In addition, in the worst case scenario, if the business applications software or other equipment fail due to Year 2000 issues, other locations of the Company can fulfill the customer requirements for any failed systems or equipment. 12. 16 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. (a) Not applicable. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8-K None 13. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RELIANCE STEEL & ALUMINUM CO. Dated: November 12, 1999 By: /s/ David H. Hannah --------------------------------------- David H. Hannah President and Chief Executive Officer By: /s/ Karla R. McDowell --------------------------------------- Karla R. McDowell Vice President and Chief Financial Officer 14. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 10,790 0 186,032 (6,686) 212,972 418,509 315,750 (94,215) 892,761 140,344 0 0 0 153,000 233,167 0 1,136,668 1,141,921 836,305 836,305 221,017 0 17,609 70,198 27,728 42,470 0 0 0 42,470 1.53 1.52
-----END PRIVACY-ENHANCED MESSAGE-----