UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, | |
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)
Delaware | 95-1142616 |
350 South Grand Avenue, Suite 5100
Los Angeles, California90071
(213) (213) 687-7700
(Address of principal executive offices, including zip code, and Registrant’s telephone number)number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value | | RS | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on June 30, 20162019 was approximately $5,380,000,000.$6,260,000,000. For purposes of this computation, it is assumed that the shares of voting stock held by Directors and Officers would be deemed to be stock held by affiliates. As of February 21, 2017, 72,857,1432020, 66,860,589 shares of the registrant’s common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting2020 annual meeting of Stockholders (the “Proxy Statement”)stockholders to be held on May 20, 2020 are incorporated by reference into Part III of this report. The Proxy Statement for the 2020 annual meeting will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
INDEX
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| 24 | ||
| 27 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 28 | |
| 39 | ||
| 41 | ||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||
80 | |||
| 80 | ||
| 80 | ||
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| 83 | ||
| 83 | ||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 83 | |
Certain Relationships and Related Transactions, and Director Independence | | 83 | |
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| 84 | ||
| 86 | ||
| 86 |
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FORWARD-LOOKING STATEMENTS
Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10‑K,10-K, the terms “Company,” “Reliance,” “we,” “our,” and “us” refer to Reliance Steel & Aluminum Co. and all of its subsidiaries that are consolidated in conformityaccordance with U.S. generally accepted accounting principles. This Annual Report on Form 10‑K10-K and the documentsinformation incorporated by reference contain forward‑lookingforward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also provide oral or written forward-looking information in other materials we release to the public. Our forward‑lookingforward-looking statements may include, but are not limited to, discussions of our industry and end markets, our business strategies and our expectations concerning future demand and metals pricing and our results of operations, margins, profitability, impairment charges, taxes, liquidity, litigation matters and capital resources. In some cases, you can identify forward‑lookingforward-looking statements by terminology such as “may,” “will,” “should,” “expects,“could,” “intends,“would,” “plans,“expect,” “anticipates,“plan,” “believes,“anticipate,” “thinks,“believe,” “estimates,“estimate,” “seeks,“predict,” “predicts,“potential,” “potential”“preliminary,” “range” and “continue,” the negative of these terms, and similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those in the future that are implied by these forward‑lookingforward-looking statements. These risks and other factors include those described in “Risk Factors” (Part I, Item 1A of this Form 10‑K)10-K) and “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A). In addition, other factors may affect the accuracy of our forward-looking information. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events and results of operations may vary materially.
We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason, except as may be required by law. You should review any additional disclosures we make in our press releases and other documents we file or furnish with the United States Securities and Exchange Commission (the “SEC”), including our Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.8-K.
This Annual Report on Form 10‑K10-K includes registered trademarks, trade names and service marks of the Company and its subsidiaries.
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PART I
We are the largest metals service center companya leading diversified metal solutions provider in North America (U.S. and Canada). Our and have been serving our customers for more than 80 years. Through a network of metals service centers operates more than 300 locations in 3940 U.S. states in the U.S. and in 12 other13 countries (Australia, Belgium, Canada, China, France, Malaysia, Mexico, Singapore, South Korea, Turkey,outside the United Arab Emirates and the United Kingdom). Through this network, we provideU.S., Reliance provides value-added metals processing services and distributedistributes a full line of more thanover 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, to more than 125,000 customers in a broad range of industries. We focus on small orders with quick turnaround and increasing levels of value-added processing. We have made significant investments in our businesses in recent years, including investments in advanced, start-of-the-art value-added processing equipment to better service our customers while simultaneously increasing our gross profit margin, resulting in higher earnings levels.
In 2016,2019, we performed value-added processing on 51% of the orders we shipped, up from 49% in 2018 and our more historical rate of about 40%. Our average order size in 2019 was $1,560, approximately 47% of our orders included value-added processing$2,090 and approximately 40% of our orders were delivered within 24 hours from receipt of the order. Many of our metals service centers process and distribute only specialty metals. We have grownIn 2019, our international presence selectively to support the globalization of our customers. We generated net sales of $8.61were $10.97 billion in 2016 and we achieved multiple financial milestones, including record net income attributable to Reliance of $304.3 million.$701.5 million, record earnings per diluted share of $10.34 and record cash provided by operations of $1.30 billion.
Our primary business strategy is to provide the highest levels of quality and service to our customers in the most efficient operational manner, allowing us to maximize our financial results. Our growth strategy is based on increasing our operating results through organic growth activities and strategic acquisitions that enhance our product, customer and geographic diversification with a focus on higher margin specialty products and value-added processing services. We focus on improving the operating performance at acquired locations by integrating them into our operational model and providing them access to capital and other resources to promote growth and efficiencies. We believe our focused growth strategy of diversifying our products, customers and geographic locations and increasing the level of value-added services provided our customers makes us less vulnerable to regional or industry specificindustry-specific economic volatility and somewhat lessens the negative impact of volatility experienced in commodity pricing and cyclicality of our customer end markets, as well as general economic trends. We also believe that our focus on servicing customers with small order sizes and quick turnaround, along with our growth and diversification strategy have been instrumental in our ability to produce industry‑leadingindustry-leading operating results among publicly traded metals service center companies in North America.
Currently, weWe have one operating segment and one reportable segment — metals service centers.centers. Further information about our reportable segments,segment, including geographic information, appears in Note 1618 — “Segment information” of Part II, Item 8 “Financial Statements and Supplementary Data.”
Industry Overview
Metals service centers acquire carbon steel, aluminum, stainless and alloy steel and other metal products from primary metals producers, which we also refer to as mills, and then process these materials to meet customer specifications using techniques such as beam, bar, pipe and tube cutting; bending, forming and shaping; coil and flat roll processing; plate and sheet cutting; machining and various other specialized services such as laser cutting, fabricating, and mechanical polishing,and electropolishing, among others. TheseCustomers purchase from service centers for a variety of reasons, including the ability to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum order sizes specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus on when-needed inventory management and materials management outsourcing in the capital goods and related industries. In general, metals service center customers have placed increased emphasis on carrying lower amounts of inventory, especially during declining price environments. We believe that many customers have also reduced their in-house processing capabilities, opting to source processed metal from service centers like us. We have invested significantly in innovative, state-of-art processing equipment in recent years that has increased our ability to raise our selling prices and increase our gross profit margins as we provide higher quality products and increase the efficiency of our customers’ manufacturing operations.
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The processing services we provide save our customers time, labor, and expense, reducing their overall manufacturing costs. Specialized metals processing equipment requires high‑volume productionhigh utilization to be cost effective. Many manufacturers and their suppliers are not able or willing to invest in the necessary technology, equipment, and warehousing of inventory to process the metalsefficiently and effectively perform metal processing for their own manufacturing or processing operations. Accordingly, we believe industry dynamics have created a niche in the market.market for metals service centers. Metals service centers purchase, process, and deliver metals to end‑usersend-users in a more efficient and cost‑effectivecost-effective manner than the end‑userend-user could achieve by dealing directly with the primary producer. Service centers comprise the largest customer group for North American mills, buying and reselling almost 50% of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass, bronze and superalloys produced in the United States according to a November 2016December 2019 report on the metals wholesaling industry issued by IBISWorld Inc., a global intelligence publication.
MetalsWe believe that metals service centers are generally less susceptible to market cycles than metals producers because service centers are generally able to pass on all or a portion of increases in metal costs to their customers, unless they are selling to their customers on a fixed‑pricefixed-price contractual basis. We believe that service center companies, like Reliance, that emphasize rapid inventory turnover and minimal contract sales, are generally less vulnerable to changing metals prices than the metals producers. However, fluctuations in metalmetals pricing have a significant impact on our revenue and profit.
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Customers purchase from service centers for a variety of reasons, including the ability to obtain value‑added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus on just‑in‑time inventory management and materials management outsourcing in the capital goods and related industries, and because the larger metal producers have reduced in‑house direct sales efforts to small sporadic purchasers to enhance their production efficiency. In general, metals service center customers have placed increased emphasis on carrying lower amounts of inventory, especially during declining price environments. Many customers have also reduced their in-house processing, sourcing processed metal from service centers like us, which has spurred some of our recent capital expenditures and also contributed to improved gross profit margins.
The metals service center industry is highly fragmented and competitive within localized areas or regions. Many of our competitors operate single, stand‑alonestand-alone service centers. According to IBISWorld Inc., the number ofthere were approximately 10,700 metal wholesale centerswholesaling locations operated by approximately 7,800 companies in the United States decreased from approximately 11,000 locations operated by more than 8,300 companies in 2002 to approximately 9,200 locations operated by more than 6,300 companies2019. The significant number of metals service centers that exist in 2016. Thisthis fragmented market, along with the consolidation trend continues to create opportunities for us to expand by making acquisitions.
According to IBISWorld Inc.,’s December 2019 report, the United States metals wholesale industry generated(which includes metals service centers) is expected to generate revenues of approximately $152.7$236.59 billion in 2016,2019, a 17% decrease over 2015of 4.3% from 2018 revenues of $183.9$247.16 billion, mainly due to declining metal prices.metals price volatility. The five largest U.S. metals service center companies are expected by IBISWorld Inc. to represent just overslightly less than 10% of the estimated $152.7$236.59 billion industry total in 2016.2019. While we remain the largest metals service center company in the United States on a revenue basis, IBISWorld Inc. estimates our 20162019 U.S. revenues accounted forof $10.10 billion represented only about 4.8%4.3% of the entire U.S. market.market based on IBISWorld Inc.’s estimated 2019 industry revenues, leaving significant opportunity for further strategic growth within the industry.
History and Overview of Reliance
Reliance Steel & Aluminum Co. was organizedIn 2019, we celebrated our 80th year in business since our original organization as a California corporation on February 3, 1939, and commenced businessoperating a single metals service center in Los Angeles, California fabricating steel reinforcing bar. Within ten years of our founding, weour metals service center had become a full‑linefull-line distributor of steel and aluminum, operating a single metals service center in Los Angeles.aluminum. In the early 1950’s,1950s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s,1960s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.
In the mid‑1970’s,mid-1970s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel or brass and copper, and equipped with automated materials handling and precision cutting equipment specific to the selected metals. In the mid‑1990’s,mid-1990s, we began to expand nationally and focused on acquiring well‑run,well-run, profitable metals service center companies, and we continue to expand our network, with a focus on providing increased levels of value-added services and specialty products to our customers as opposed to merely distributing metal. We reincorporated in the State of Delaware in 2015. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994.
We reincorporated in the State
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We continue to execute our growth strategy and have become the largest North American (U.S. and Canada) metals service center company based on revenues, with over 300 locations and 20162019 net sales of $8.61$10.97 billion. Although weWe continue to expand the types of metals that we sell and the processing services that we perform we have not diversified outside of our core business and we strive to consistently perform as the best in our industry. We focus on smaller customers and order sizes with quick turnarounds and have steadily increased the percentage of our orders with processing performed. We currently operate metals service centers under the following trade names:
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Operational Strategy Our executive officers maintain a control environment that is focused on integrity and ethical Safety is our top priority and an important element of our day-to-day operational focus. Our executive team supports a safety management system that includes policies, standard practices and goals at our facilities. In addition, our safety professionals monitor compliance with regulatory requirements and conduct safety assessments and training to improve safety practices. We seek to increase profitability through improvements in our customer service, operational efficiencies, pricing discipline, and inventory management as well as by providing increased levels of value-added processing. 5 Historically, we have expanded through both acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased 67 businesses. Our internal growth activities during the last few years, which are supported by our capital expenditures, have been at historically high levels with 2019 being a record at $242.2 million, and have included opening new facilities, adding to our processing capabilities, upgrading processing equipment, relocating existing operations to larger, more efficient facilities, improving the safety of our operations and enhancing the working environments of our employees. Our investments in processing equipment have allowed us to increase the range of value-added services that we provide to our customers and increase our efficiency, which we believe has contributed to the recent increases in our gross profit margin. These investments also differentiate us from our competitors and have allowed us to focus our efforts on higher margin business. We will continue to evaluate acquisition opportunities and we expect to continue to grow our business through acquisitions and internal growth initiatives, particularly those that will diversify our products, customer base and geographic locations and increase our sales of high-margin specialty products and value-added processing. Customers and Markets
We have more than 125,000 customers in a variety of industries, including general manufacturing, Although we sell directly to many large original equipment manufacturer Our acquisitions in recent years have increased our international exposure from both a customer and physical location perspective. In addition, we have built and opened international locations in recent years to service specific industries, typically making limited investments to support existing key U.S. customers that
Customer demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in a wide variety of industries, we believe that
Due to our focus on small orders, decentralized operating structure and the diversity of The geographic breakout of our sales based on the location of our metals service center facilities in each of the three years ended December 31 was as follows:
Suppliers We primarily purchase our inventory from the major domestic metals Because of our total volume of purchases and our Backlog Because of the Capital Expenditures We maintained our focus on internal growth in 2019 by opening new facilities, building or expanding existing facilities, adding processing equipment, improving the safety of our operations and enhancing the working environments of our employees with record capital expenditures of $242.2 million, with the majority growth-related. Our 2020 capital expenditure budget is approximately $250 million, much of which is again related to internal growth activities comprised of purchases of equipment and new facilities, expansions of existing facilities and the purchase of existing facilities that we currently lease. The amount of our capital expenditure budget reflects our confidence in our long-term prospects; however, we will continue to evaluate and execute each growth project and consider the economic conditions and outlook at the time of investment. We estimate our maintenance capital expenditures at approximately $90 to $100 million annually, which allows us to significantly reduce our capital expenditures if economic conditions warrant a more conservative approach to capital allocation and provides flexibility to redirect capital to other strategic priorities. 7 Products and Processing Services We provide a wide variety of processing services to meet our customers’ specifications and deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of products in inventory, and believe this differentiates us from all other North American service centers. Approximately
competitive advantage to us, and, for the remainder of our orders we typically have shorter lead times than our competitors given our decentralized structure and investments in processing equipment. Our product mix has 8 Our gross sales dollars by product type as a percentage of total sales in each of the three years ended December 31 were as follows:
We are not dependent on any particular customer group or industry because we process and distribute a variety of metals. This diversity of product type and material reduces our exposure to fluctuations or other weaknesses in the
financial or economic stability of particular customers or industries. We are also less dependent on any particular suppliers as a result of our product diversification. For sheet and coil products, we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between 0.015 and 0.25 inches thick, and rolled into We believe that few metals service centers offer the broad range of processing services and metals that we provide. In addition to a focus on growing our revenues from specialty products, we have also 9 processing services we provide through recent acquisitions and significant investments in new equipment over the past few After receiving an order, we enter it into one of our In We generally only process specific metals to Sales and Marketing As of December 31, Our business is
Competition
The metals We compete with other companies on price, service, quality, processing capability and availability of 10 of processing services we Quality Control Procuring high quality metal from suppliers on a consistent basis is critical to our business. We have instituted strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. In certain instances, we perform physical and chemical analyses on selected raw materials, typically through a third party testing lab, to verify that mechanical and dimensional properties, cleanliness and surface characteristics meet our requirements and our customers’ specifications. We also conduct certain analyses of surface characteristics on selected processed metal before delivery to the customer. We believe that maintaining high standards for accepting metals ultimately results in reduced return rates from our customers. We maintain various quality certifications throughout our operations. Approximately
Government Regulation Our Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and related regulations, which, among other requirements, establish noise, dust and safety standards. We maintain comprehensive health and safety policies and encourage our employees to follow established safety practices. Safety of our employees and others is critical to our success. We continue to expand and improve our internal safety resources, which has contributed positively to our safety metrics and financial results. We encourage social We are subject to the conflict mineral provisions of the We sell metals to foreign customers and otherwise operate abroad, subjecting us to various countries’ trade regulations concerning the import and export of materials and finished products. Our operations are subject to the laws and regulations of the jurisdictions in which we conduct our business that seek to prevent corruption and bribery in the marketplace, including the United States’ Foreign Corrupt Practices Act (the “FCPA”) and the United Kingdom’s Bribery Act 2010. We have developed and implemented 11 Environmental
Some of the properties we own or lease are located in industrial areas with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. In addition, we are currently involved with a certain environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our wholly owned subsidiary, that were sold many years prior to We believe that all scrap metal produced by our operations is recycled by the independent scrap metal companies and producers to whom we sell our scrap metal. We continue to evaluate and implement energy conservation and other initiatives to reduce pollution and
Employees
As of December 31, Seasonality Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. Our overall operations have not shown any material seasonal trends as a result of our geographic, product and customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from holidays observed by the Company as well as vacation and extended holiday closures at some of our customers. Reduced shipping days also have a significant impact on our Available Information We file annual, quarterly and current reports, proxy statements and other documents with the Our Investor Relations website is located at http://investor.rsac.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available, free of charge, through our website as soon as reasonably practical after we electronically file or furnish the reports to the SEC. We encourage investors to visit our website. The website addresses presented above are not intended to function as hyperlinks, and the information contained in our website and in the SEC’s website is not intended to be a part of this filing. 12 Item 1A. Risk Set forth below are the risks that we believe are material to our investors. Our business, results of operations and financial condition may be materially adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business. Risks Related to Our Business and Industry The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers. We purchase large quantities of aluminum, carbon,
metal at a rate that would allow us to maintain a consistent gross profit margin, which would reduce our profitability during that interim period. Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability and related pricing, metals consumption, tariffs, import levels into the U.S., and the strength of the U.S. dollar relative to other currencies. Future changes in global general economic conditions or in production, consumption or export of metals could cause fluctuations in metal prices globally, which could adversely affect our profitability and cash flows. We generally do not enter into We maintain substantial inventories of metal to accommodate the short lead times and delivery requirements of our customers. Our customers typically purchase products from us pursuant to purchase orders and typically do not enter into
Global metal-making capacity exceeds demand for metal products in some regions around the world. Rather than reducing employment by
13 Trade Expansion Act of 1962 (the “Section 232”) tariffs. Application of the tariffs commenced March 23, 2018, with temporary or long-term exemptions for We expect that these tariffs, while in Currency fluctuations and changes in the worldwide balance of supply and demand could negatively impact our profitability and cash flows. Significant currency fluctuations in the United States or abroad could negatively impact our cost of metals and the pricing of our products. A decline in the U.S. dollar relative to foreign currencies may result in increased prices for metals and metal products in the United States and reduce the amount of metal imported into the U.S. as imported metals become relatively more expensive. We may not be able to pass these increased costs on to our customers. If the value of the U.S. dollar improves relative to foreign currencies, this may result in increased metal being imported into the U.S., which in turn may pressure existing domestic prices for metal. This could also occur if global economies are weaker than the U.S. economy, creating a significant price spread between the U.S. and foreign markets.
We operate in an industry that is subject to cyclical fluctuations and any downturn in general economic conditions or in our customers’ specific industries could negatively impact our profitability and cash flows. The metals service center industry is cyclical and impacted by both market demand and metals supply. Periods of economic slowdown or recession in the United States or other countries, or the public perception that these may occur, could decrease the demand for our products and adversely affect our pricing. If either demand or pricing were to decline from the current levels, this could reduce our profitability and cash flows. We sell many products to industries that are cyclical, such as the We compete with a large number of companies in the metals service center industry, and, if we are unable to compete effectively, our profitability and cash flows may decline. We compete with a large number of other 14 If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales. We have few
to move their business to our competitors or to file claims against us, and such claims may be more difficult to pass through to foreign suppliers. There has been significant consolidation at the metal producer level both globally and within the U.S. This consolidation has reduced the number of suppliers available to us, which We rely upon our suppliers as to the specifications of the metals we purchase from them. We rely on mill certifications that attest to the physical and chemical specifications of the metal received from our suppliers for resale and generally, consistent with industry practice, we do not undertake independent testing of such metals unless independent tests are required by customers. We rely on customers to notify us of any metal that does not conform to the specifications certified by the supplying mill. Although our primary sources of products have been domestic mills, we have and will continue to purchase product from foreign suppliers when we believe it is appropriate. In the event that metal purchased from domestic suppliers is deemed to not meet quality specifications as set forth in the mill certifications or customer specifications, we generally have recourse against these suppliers for both the cost of the products purchased and possible claims from our customers. However, such recourse will not compensate us for the damage to our reputation that may arise from We face increased competition from alternative materials and risks concerning innovation, new technologies, products and increasing customer requirements. As a result of increasingly stringent regulatory requirements, designers, engineers and industrial manufacturers, especially those in the automotive industry, are increasing their use of lighter weight and alternative materials, such as composites, plastics, glass and carbon fiber. Use of such materials could reduce the demand for metal products, which may reduce our profitability and cash flow. 15 Climate change might adversely impact our supply chain or our operations. Concern about climate change might result in new legal and regulatory requirements to reduce or mitigate the effects of climate change. These changes may result in higher prices for metal, higher prices for utilities required to run our facilities, higher fuel costs for us and our suppliers and other adverse impacts. To the extent that new legislation or regulations increase our costs, we may not be able to fully pass these costs on to our customers without a resulting decline in sales and adverse impact to our profits. There is also increased focus by governmental and non-governmental entities on sustainability matters. Any perception that we have failed to act responsibly regarding climate change could result in negative publicity and adversely affect our business and reputation. If metals prices increase compared to certain substitute materials, the demand for our products could be negatively impacted, which could have an adverse effect on our financial results. In certain applications, metal products compete with other materials, such as composites, glass, carbon fiber and plastic. Prices of all of these materials fluctuate widely, and differences between the prices of these materials and the price of metal products may adversely affect demand for our products and/or encourage material substitution, which could adversely affect the prices of and demand for metal products. The higher cost of metal relative to certain other materials may make material substitution more attractive for certain uses. Our insurance coverage, customer indemnifications or other liability protections may be unavailable or inadequate to cover all of our significant risks or our insurers may deny coverage of or be unable to pay for material losses we incur, which could adversely affect our profitability and overall financial position. We In some circumstances we may be entitled to certain legal protections or indemnifications from our customers through contractual provisions, laws, regulations or otherwise. However, these protections are not always available, are typically subject to certain terms or limitations, including the availability of funds, and may not be sufficient to cover all losses or liabilities incurred. If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient to cover our risks or losses, it could have a material adverse effect on our financial position, results of operations and/or cash flows. An increase in delinquencies or net losses of customers could adversely affect our results.
Inherent in the operation of our business is the credit risk associated with our customers. The creditworthiness of each customer and the rate of delinquencies and net losses on customer obligations are directly impacted by several factors, including relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices and political events. Any increase in delinquencies and net losses on customer obligations could have a material adverse effect on our earnings and cash flows. In addition, although we evaluate
and adjust allowances for credit losses related to past due and non-performing receivables on a regular basis, adverse economic conditions or other factors that might cause deterioration of the financial health of our customers could change the timing and level of payments received and thus necessitate an increase in our estimated losses, which could also have a material adverse effect on our earnings and cash flows. 16 If we do not successfully implement our growth strategy, our ability to grow our business could be impaired. We may not be able to identify suitable acquisition candidates or successfully complete any acquisitions or integrate any other businesses into our operations. If we cannot identify suitable acquisition candidates or are otherwise unable to complete acquisitions, we may not be able to continue to grow our business as expected and, if we cannot successfully integrate We have invested a significant amount of capital in new locations and new processing capabilities. We may not continue to identify sufficient opportunities for internal growth to be able to sustain growth at similar levels. In addition, we may not realize the expected returns from these investments. Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of each transaction. Since our initial public offering in September 1994, we have successfully purchased
17
These factors could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger acquisition or the completion of a number of acquisitions in any short period of time. In addition, most of the acquisition agreements we have entered into require the former owners to indemnify us against certain liabilities related to the operation of those companies before we acquired them. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. Similarly, the purchasers of our non-core businesses may from time to time agree to indemnify us for operations of such businesses after the closing. We cannot be assured that any of these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our consolidated results of operations, financial condition and cash flows. We are a decentralized company, which presents certain risks.
As a decentralized business, we depend on both senior management and our key operating employees. If we are unable to attract and retain these individuals, our ability to operate and grow our business may be adversely affected. Because of our decentralized operating 18 We are subject to various environmental, employee safety and health, and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures. We are subject to
also subject to customs and export laws and regulations for international shipment of our products. Environmental, employee safety and health, and customs and export laws and regulations are comprehensive, complex and frequently changing. Some of these laws and regulations are subject to varying and conflicting interpretations. We We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations. Eleven percent of our Our operating results could be negatively affected by the global laws, rules and regulations, as well as political environments in the jurisdictions in which we operate. There could be reduced demand for our products, decreases in the prices at which we can sell our products and disruptions of production or other operations. Additionally, there may be substantial capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could negatively impact our operating results. In addition, new or revised laws or regulations may alter the environment in which we do business, including the United Kingdom's withdrawal from the European Union, which could adversely impact our financial results. For example, new legislation or regulations may result in loss of revenue for our businesses in the United Kingdom that serve customers in the European Union or increased costs to us, directly for our compliance, or indirectly to the extent suppliers increase prices of goods and services because of increased compliance costs, excise taxes or reduced availability of materials. Our international operations continue to expand, exposing us to additional risks. Our international presence has grown, so the risk of incurring liabilities or fines resulting from 19 prohibit companies and their intermediaries from corruptly paying, offering to pay, or authorizing the payment of money, a gift, or anything of value, to a foreign official or foreign political party, for purposes of obtaining or retaining business. A company can be held liable under these We may be subject to risks relating to changes in our tax rates or exposure to additional income tax liabilities. We are subject to income taxes in the United States and various
allowance of deferred tax assets or changes in tax rates or tax laws or regulations. In particular, although the passage of the Tax Cut and Jobs Act of 2017 reduced the U.S. tax rate to 21%, our future earnings could be negatively impacted by changes in tax legislation including changing tax rates and tax base such as limiting, phasing-out or eliminating deductions or tax credits, changing rules for earnings repatriations and changing other tax laws in the U.S. or other countries. In addition, it is uncertain if, and to what extent, various states will conform to the new tax law and foreign countries will react by adopting tax legislation or taking other actions that could adversely affect our business. In addition, the amount of income taxes we pay is subject to audits by U.S. federal, state and local tax authorities and by
We rely on information management systems and any damage, interruption or compromise of our information management systems or data could disrupt and harm our business. We rely upon information technology systems and networks, some of which are managed by third parties, to process, transmit, and store electronic information in connection with the operation of our business. Additionally, we collect and store data that is sensitive to our company. Operating these information technology systems and networks and processing and maintaining this data, in a secure manner, In addition, our systems and data Given the unpredictability of the timing, nature and scope of 20 timely complete required filings with government entities including the SEC and the Internal Revenue Service, unavailability or disclosure of confidential information (including personal information) and negative impact on our stock price.
We collect, store, have access to Our enterprise data practices, including the collection, use, sharing, and security of the personal identifiable information of our customers, employees, or suppliers are subject to increasingly complex, restrictive, and punitive regulations in all key market regions. Under these regulations, the failure to maintain compliant data practices could result in consumer complaints and regulatory inquiry, resulting in civil or criminal penalties, as well as brand impact or other harm to our business. In addition, increased consumer sensitivity to real or perceived failures in maintaining acceptable data practices could damage our reputation and deter current and potential users or customers from using our products and services. Because many of these laws are new,
Our financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters. We are subject to a variety of litigation and legal compliance risks. These risks include, among other things, possible liability relating to product liability, personal injuries, intellectual property rights, The volatility of the market could result in a material impairment of goodwill or We review the recoverability of goodwill and 21 viability of end markets (such as the energy market in which we have downsized a business due to Our business operations and financial performance could be adversely affected by changes in our relationship with our employees or changes to U.S. or foreign employment regulations. We had approximately We face certain risks associated with potential labor disruptions. Approximately 11% of our employees are covered by collective bargaining agreements and/or are represented by unions or workers’ councils. Approximately Risks Related to our Indebtedness Our indebtedness could impair our financial condition or cause a downgrade of our credit rating and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.
We have substantial debt service obligations. As of December 31,
22 Our existing debt agreements contain financial and restrictive covenants that limit the total amount of debt that we may incur, and may limit our ability to engage in other activities that we may believe are in our We may not be able to generate sufficient cash flow to meet our existing debt service obligations. Our ability to generate sufficient cash flow from operations, draw on our revolving credit facility or access the capital markets to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. For example, we may not generate sufficient cash flow from our operations or new acquisitions to repay amounts drawn under our revolving credit facility when it matures in 2021, amortization payments on our term loan and the balance to be paid when it matures in 2021, or our debt securities when they mature in 2023 and 2036. If we do not generate sufficient cash flow from operations or have availability to borrow on our revolving credit facility to satisfy our debt obligations, we would expect to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We may not be able to consummate any such transactions at all or on a timely basis or on terms, and for proceeds, that are acceptable to us. These transactions may not be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations or to timely refinance our obligations on acceptable terms could adversely affect our ability to serve our customers or we may not be able to continue our operations as planned. Changes in the Company’s credit ratings could increase cost of funding. Our credit ratings are important to our cost of capital. The major rating agencies routinely evaluate our credit profile and assign debt ratings to Reliance. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. Any downgrade in our credit rating could increase our cost of capital and have a material adverse effect on our business, financial condition, results of operations or cash flows. We are permitted to incur more debt, which may intensify the risks associated with our current leverage, including the risk that we will be unable to service our debt or that our credit rating may be downgraded. We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous
qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. If we incur additional debt, the risks associated with our leverage, including the risk that we will be unable to service our debt or that we may be subject to a credit rating downgrade, may increase. Our acquisition strategy and growth capital expenditures may require access to external capital, We may have to rely on external financing sources, including commercial borrowings and issuances of debt and equity securities, to fund our acquisitions and growth capital expenditures. Limitations on our access to external financing sources, whether due to tightened capital markets, more expensive capital or otherwise, could impair our ability to execute our growth strategy. Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing A substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain 23 we had On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Financial industry working groups are developing replacement rates and methodologies to transition existing agreements that depend on LIBOR as a reference rate; however, we can provide no assurance that market-accepted rates and transition methodologies will be available and finalized at the time of LIBOR cessation. If Item 1B. Unresolved Staff None. As of December 31,
Item 3. Legal From time to time, we are named as a defendant in legal actions. Generally, these actions arise Item 4. Mine Safety Not applicable. PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is 24 16, 1994.
We have paid quarterly cash dividends on our common stock for
On October
stockholders to be held on May 20, 2020. Stock Performance Graph This graph is not deemed to be “filed” with the U.S. Securities and Exchange Commission (SEC) or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act. The following graph compares the performance of our common stock with that of the S&P 500, the Russell 2000 and an industry peer group consisting of publicly-traded metals service center companies (the “industry peer group”) for the 25 The stock price performance shown on the graph below is not necessarily indicative of future price performance. Comparison of 5 Year Cumulative Total Return Among Reliance Steel & Aluminum Co.,
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Item 6. Selected Financial We have derived the following selected SELECTED CONSOLIDATED FINANCIAL DATA
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Overview
Certain key financial results for
Our same-store tons sold decreased
significantly from
We believe that our broad end market exposure, We will continue to focus on working capital management and maximizing profitability of our existing 28 Effect of Demand and Pricing Changes on our Operating Results Customer demand can have a significant impact on our results of operations. When volume increases, our revenue dollars generally increase, which contributes to increased gross profit dollars. Variable costs also increase with volume, Pricing for our products In addition, when volume or pricing increases, our working capital (primarily accounts receivable and inventories) requirements typically increase, resulting in lower levels of cash flow from operations, which may also require us to increase our outstanding debt and incur higher interest expense. Conversely, when Acquisitions
On December 31, 2019, we acquired Fry Steel Company (“Fry Steel”). Fry Steel is a general line and long bar distributor located in Santa Fe Springs, California. Fry Steel specializes in the cutting of various bar products including stainless, alloy, aluminum, carbon, brass and bronze. No sales of Fry Steel were included in our net sales for 2019. We funded our 2019 acquisition of Fry Steel with borrowings on our revolving credit facility and cash on hand. 2018 Acquisitions On November 1, 2018, we acquired All Metals Holding, LLC, including its operating subsidiaries All Metals Processing & Logistics, Inc. and All Metals Transportation and Logistics, Inc. (collectively, “All Metals”). All Metals is headquartered in Spartanburg, South Carolina with an additional facility in Cartersville, Georgia. All Metals specializes in toll processing for automotive, construction, appliance and other end markets, and provides value-added transportation and logistics services for metal products from six strategically located terminals throughout the southeastern United States. All Metals’ net sales in 2019 were $29.7 million. On October 23, 2018, we purchased the remaining 40% noncontrolling interest of Acero Prime, a toll processor in Mexico, which increased our ownership from 60% to 100%. Acero Prime, headquartered in San Luis Potosi, has four toll processing locations. Acero Prime performs metal processing services such as slitting, multi-blanking and oxy-fuel cutting, as well as storage and supply-chain management for a variety of different industries including automotive, home appliance, lighting, HVAC, machinery and heavy equipment. Acero Prime’s net sales in 2019 were $44.8 million. We have consolidated the financial results of Acero Prime since October 1, 2014 when we acquired a controlling interest. On August 1, 29 On March 1, 2018, we acquired DuBose National Energy Services, Inc. (“DuBose Energy”) and its affiliate, DuBose National Energy Fasteners & Machined Parts, Inc. (“DuBose Fasteners” and, together with DuBose Energy, “DuBose”). DuBose is headquartered in Clinton, North Carolina. DuBose specializes in fabrication, supply and distribution of metal and metal products to the nuclear industry, including utilities, component manufacturers and contractors. DuBose’s net sales in 2019 were $42.9 million. We funded our 2018 acquisitions with borrowings on our revolving credit facility and cash on hand. 2017 Acquisition On October 2, 2017, through our wholly owned subsidiary We funded our acquisition of
Internal Growth Activities We continued to maintain our focus on internal growth by opening new facilities, building or expanding existing facilities, adding and
Results of Operations The following table sets forth certain income statement data for each of the last three years ended December 31,
Year Ended December 31, Net Sales
31
Tons sold and average selling price per ton sold amounts exclude our toll processing sales (as we process the metal for a fee, without taking ownership of the metal). Our Demand in
Since we primarily purchase and sell our inventories in the Our same-store average selling price per ton sold in
Our major commodity selling prices changed year-over-year from 2018 to 2019 as follows:
Cost of Sales
The decrease in cost of sales in
Our LIFO inventory valuation reserve 32 Gross Profit
Expenses
Our same-store S,G&A expense
We recorded a Operating Income
33
Our operating income was
Income Tax Rate Our effective income tax rate in
Net Income
The Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 See discussion in the Liquidity and Capital Resources Operating Activities Net cash provided by Investing Activities Net cash used in investing activities of The majority of our 34 Financing Activities
On October
Liquidity
Our primary sources of liquidity are funds generated from operations and our $1.5 billion revolving credit facility. Our total outstanding debt at December 31, On September 30, 2016, we entered into a $2.1 billion unsecured five-year credit agreement (“Credit Agreement”) comprised of a $1.5 billion unsecured revolving credit facility and a $600.0 million unsecured term loan, with an option to increase the revolving credit facility Revolving credit facilities with a combined credit limit of We believe our existing sources of liquidity are sufficient to satisfy our working capital needs, capital expenditures and financial commitments, as well as continued stockholder return activities. Capital Resources On November 20, 2006, we entered into an indenture (the “2006 Indenture”) 35 amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, which matured and were repaid on November 15, 2016; and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036. On April 12, 2013, we entered into an indenture (the “2013 Indenture” and, together with the 2006 Indenture, the “Indentures”) Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations.
Various industrial revenue bonds had combined outstanding balances of
As of December 31, Covenants The Credit Agreement We were in compliance with all financial covenants in our Credit Agreement at December 31,
We do not have any As of December 31,
Contractual Obligations and Other Commitments The following table summarizes our contractual obligations as of December 31,
Contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding on our company and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are typically fulfilled by our vendors within short time periods. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of goods specifying minimum quantities and set prices that exceed our expected requirements for three months. Therefore, agreements for the purchase of goods and services are not included in the table above except for certain purchases where we have significant lead times or corresponding The expected timing of payments Inflation Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices. Seasonality Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. Our overall operations have not shown any material seasonal trends as a result of our geographic, product and
customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from holidays observed by the Company as well as vacation and extended holiday closures at some of our customers. Reduced shipping days also 37 have a significant impact on our Goodwill and Other Intangible Assets We have one operating segment and also one reporting unit for goodwill impairment purposes. There Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to Critical Accounting Policies and Estimates
We believe the following critical accounting estimates, as discussed with our Audit Committee, affect our more significant judgments and estimates used in preparing our consolidated financial statements. (See Note 1 —
We
38 Impairment
Long-Lived Assets
We periodically review the recoverability of our other Impact of Recently Issued Accounting Standards Please refer to Note 1 Item 7A. Quantitative and Qualitative Disclosures About Market In the ordinary course of business, we are exposed to various market risk factors, including changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates, and metals pricing, demand and availability. Commodity price risk Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability, metals consumption, import levels into the U.S., global economic factors and foreign currency exchange rates. We do not currently use financial derivatives to hedge our exposure to metal price volatility. Decreases in metal prices could adversely affect our revenues, gross profit and net income. Because we primarily purchase and sell in the Foreign exchange rate risk Because we have foreign operations, we are exposed to foreign currency exchange gains and losses. The currency effects of translating the financial statements of our foreign subsidiaries, which operate in local currency environments, 39 are included in accumulated other comprehensive loss and do not impact earnings unless there is a liquidation or sale of those foreign subsidiaries. We do not currently hedge our net investments in foreign subsidiaries due to the Total foreign currency transaction gains and losses Interest rate risk We are exposed to market risk related to our
affect the market value of our Market risk related to our LIBOR Phase Out Amounts drawn under our Credit Agreement may bear interest rates in relation to LIBOR, depending on our selection of repayment options. In July 2017, the Financial Conduct Authority in the U.K. announced a desire to phase out LIBOR as a benchmark by the end of 2021. The Alternative Reference Rates Committee, a steering committee consisting of large U.S. financial institutions convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, has recommended replacing LIBOR with the Secured Overnight Financing Rate (SOFR), a new index supported by short-term Treasury repurchase agreements. Although there have been some transactions utilizing SOFR, it is unknown whether this alternative reference rate will attain market acceptance as a replacement for LIBOR. The agreement governing our Credit Agreement includes provisions to determine a replacement rate for LIBOR if necessary during its term. We currently do not expect the transition from LIBOR to have a material impact on us. However, if clear market standards and replacement methodologies have not developed as of the time LIBOR becomes unavailable, we may have difficulty reaching agreement on acceptable replacement rates under our Credit Agreement. If we are unable to negotiate replacement rates on favorable terms, it could have a material adverse effect on our earnings and cash flows.
Item 8. Financial Statements and Supplementary Data RELIANCE STEEL & ALUMINUM CO. AUDITED CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All other schedules are omitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.
Report of Independent Registered Public Accounting Firm
Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Reliance Steel & Aluminum Co. and subsidiaries (the Company) as of December 31, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial Change in Accounting Principle As discussed in Notes 1 and 10 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Update (ASU) No. 2016-02, Leases (Topic 842) and all related amendments. Basis for Opinion These consolidated financial statements We conducted our audits in accordance with the standards of the
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
42 Evaluation of the As described in Notes 1 and 7 to the consolidated financial We identified the assessment of the The primary procedures performed to address this critical audit matter included the following. We tested certain internal
We have served as the Company’s auditor since 2008. Los Angeles, California February
RELIANCE STEEL & ALUMINUM CO. CONSOLIDATED BALANCE (in millions, except
See accompanying notes to consolidated financial statements.
RELIANCE STEEL & ALUMINUM CO. CONSOLIDATED STATEMENTS OF (in millions, except number of shares which are reflected in thousands and per share amounts)
See accompanying notes to consolidated financial statements.
RELIANCE STEEL & ALUMINUM CO. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (in millions)
See accompanying notes to consolidated financial statements.
RELIANCE STEEL & ALUMINUM CO. CONSOLIDATED STATEMENTS OF (in millions, except
See accompanying notes to consolidated financial statements.
RELIANCE STEEL & ALUMINUM CO. CONSOLIDATED STATEMENTS OF CASH (in millions)
See accompanying notes to consolidated financial statements.
RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, Note 1. Summary of Significant Accounting Principles of Consolidation The accompanying consolidated financial statements include the accounts of Reliance Steel & Aluminum Co. and its subsidiaries (collectively referred to as “Reliance”, “the Company”, “we”, “our” or “us”). Our consolidated financial statements include the assets, liabilities and operating results of Business We operate a metals service center network of more than 300 locations in Accounting Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, such as allowances for uncollectible accounts, Accounts Receivable and Concentrations of Credit Risk Concentrations of credit risk with respect to trade receivables are limited due to the geographically diverse customer base, with limited exposure to any single customer account, and various industries into which our products are sold. Trade receivables are typically Inventories The majority of our inventory is valued using the 49 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 of valuation is subject to
Fair Values of Financial Instruments Fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities, current maturities of operating lease liabilities and Cash Equivalents We consider all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash and cash equivalents with Goodwill and Other Indefinite-Lived Intangible Assets Goodwill is the excess of We test for impairment of goodwill
Property, plant and equipment is recorded at cost (or at fair value for assets acquired in connection with business combinations) and the provision for depreciation of these assets is generally computed on the
50 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 circumstances indicate that the carrying amount of such assets may not be recoverable. We recognized impairment losses of
Revenue Recognition We recognize revenue Metal Sales We have minimal long-term contract sales with our customers as we primarily transact in the spot market under fixed price sales orders. The majority of our metal product sales orders generally have only 1 performance obligation: sale of processed or terms. Shipping and handling charges to our customers are included in
Toll processing services relate to the processing of customer-owned metal. Logistics services primarily include transportation services for metal we toll-process. Revenue for these services is recognized over time as the toll processing or logistics services are performed. The toll processing services are generally short-term in nature with the service being performed in less than one day. Seasonality Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. However, our overall operations have not shown any material seasonal trends as a result of our geographic, product and customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from holidays observed by the Company as well as vacation and extended holiday closures at some of our customers. Stock-Based Compensation All of our 51 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Environmental Remediation Costs We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. We are not aware of any environmental remediation obligations that would materially affect our operations, financial position or cash flows. See Note Income Taxes We file a consolidated U.S. federal income tax return with our wholly owned domestic subsidiaries.
We make a comprehensive review of our uncertain tax positions on a quarterly basis. Tax benefits are recognized when it is On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was enacted, which included significant changes to the taxation of U.S. corporations. These changes include, among other things, a reduction of the U.S. federal statutory rate from 35% to 21% effective in 2018, the implementation of a territorial tax system, a one-time tax in 2017 on accumulated foreign profits that have not been previously subject to U.S. tax law (transition tax), the repeal of the corporate alternative minimum tax and changes to business deductions, including a new limitation on the deductibility of business interest, stricter limits on the deductibility of certain executive compensation and the repeal of the deduction for domestic production activities. For further discussion of the impact of the tax legislation, see Note 11 — “Income Taxes.” Foreign Currencies The currency effects of translating the financial statements of our foreign subsidiaries, which operate in local currency environments, are included in other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the results of operations in the Other Impact of Recently Issued Accounting
52 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 a lease liability using a modified retrospective transition method and provide enhanced disclosures. In July 2018, the FASB issued an update to these accounting changes providing an additional, optional transition method that allows lessees the option to initially apply the new accounting changes at the adoption date while continuing to present all prior periods under previous lease accounting guidance. We adopted the new standard on January 1, 2019 using the optional transition method and available practical expedients. The practical expedients allow us, among other things, to carry forward our assessment of lease classification and remaining lease terms under the previous lease accounting guidance. Our adoption of the Impact of Recently Issued Accounting Standards—Not Yet Adopted
Note 2. Acquisitions 2019 Acquisition On December 31, 2019, we acquired Fry Steel Company (“Fry Steel”). Fry Steel is a general line and long bar distributor located in Santa Fe Springs, California. Fry Steel specializes in the
RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, The preliminary allocation of the total purchase price for our 2019 acquisition of Fry Steel to the fair values of the assets acquired and liabilities assumed was as follows:
We funded our acquisition of Fry Steel with borrowings on our revolving credit facility and cash on hand. The purchase price allocation is pending the completion of purchase price adjustments, based on tangible and intangible asset valuations, and the completion of pre-acquisition period tax returns. 2018 Acquisitions
On October 23, 2018, we purchased the remaining 40% noncontrolling interest of Acero Prime, S. de R.L. de C.V. (“Acero Prime”), a toll processor in Mexico, which increased our ownership from 60% to 100%. Acero Prime, headquartered in San Luis Potosi, has 4 toll processing locations. Acero Prime performs metal processing services such as slitting, multi-blanking and oxy-fuel cutting, as well as storage and supply-chain management for a variety of different industries including automotive, home appliance, lighting, HVAC, machinery and heavy equipment. Acero Prime’s net sales were $44.8 million in 2019. We have consolidated the financial results of Acero Prime since October 1, 2014 when we acquired a majority interest. Consequently, the increase in our ownership from 60% to 100% was accounted for as an equity transaction. On August 1,
On March 1, 2018, we acquired DuBose National Energy Services, Inc. (“ 54 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, and metal products to the nuclear industry, including utilities, component manufacturers and contractors. DuBose’s net sales were
We funded our The
On
We funded our
Summary purchase price allocation information for all acquisitions All of the acquisitions discussed in this note other than Acero Prime have been accounted for under the acquisition method of accounting and, accordingly, each purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of each acquisition. The accompanying consolidated statements of income include the revenues and expenses of each acquisition since its respective acquisition date. The consolidated balance sheets reflect the allocations of each acquisition’s purchase price as of December 31, The increase in our ownership of Acero Prime from 60% to 100% in 2018 was accounted for as an equity transaction. The difference between the $29.0 million consideration paid and the $19.7 million noncontrolling interest, or $9.3 million, was recognized as a decrease in total Reliance stockholders’ equity.
RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, As part of the purchase price allocations Note 3. Joint Ventures and Noncontrolling Interests The equity method of accounting is used where our investment in voting stock gives us the ability to exercise significant influence over the investee, generally 20% to 50%. The financial results of investees are generally consolidated when the ownership interest is greater than 50%. We have Operations that are majority owned by us are as follows: On
Note 4. Inventories Our inventories are primarily stated on the LIFO method, which is not in excess of market. We use the LIFO method of inventory valuation because it results in a better matching of costs and revenues. The cost of inventories stated on the Inventories consisted of the following:
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 The changes in the LIFO inventory valuation reserve and impact of LIFO liquidations were as follows:
** Insignificant liquidations of LIFO inventory quantities. Cost decreases for the majority of our products were the primary cause of the
Note 5. The following table presents our sales disaggregated by product and service. Certain sales taxes or value-added taxes collected from customers are excluded from our reported sales.
Note 6. Goodwill The changes in the carrying amount of goodwill are as follows:
57 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 We had Note Intangible assets, net, consisted of the following:
Amortization expense for intangible assets amounted to The following is a summary of estimated aggregate amortization expense for each of the next five years:
Note The cash surrender value of all life insurance policies held by us, net of loans and related accrued interest, was Our wholly owned subsidiary, Earle M. Jorgensen Company (“EMJ”), is the owner and beneficiary of life insurance policies on all former nonunion employees of a predecessor company, including certain current employees of EMJ. These policies, by providing payments to EMJ upon the death of covered individuals, were designed to provide cash to EMJ in order to repurchase shares held by employees in EMJ’s former employee stock ownership plan and shares held individually 58 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 by employees upon the termination of their employment. We are also the owner and beneficiary of key Cash surrender value of the life insurance policies increases by a portion of the amount of premiums paid and by investment income earned under the policies and decreases by the amount of cost of insurance charges, investment losses and interest on policy loans, as applicable.
Annually, we borrow against the cash surrender value of policies to pay a portion of the premiums and accrued interest on loans against those policies. We borrowed
As of December 31, Income earned on our life insurance policies, cost of Note 9. Debt
Debt consisted of the following:
Unsecured Credit Facility On September 30, 2016, we entered into a $2.1 billion unsecured five-year credit agreement (“Credit Agreement”) comprised of a $1.5 billion unsecured revolving credit facility and a $600.0 million unsecured term loan, with an option to increase the revolving credit facility 59 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 pay a commitment fee at an annual rate of Weighted average interest rates on borrowings outstanding on the revolving credit facility were Senior Unsecured Notes On November 20, 2006, we entered into an indenture (the “2006 Indenture”)
2016 and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036. On April 12, 2013, we entered into an indenture (the “2013 Indenture” and, together with the 2006 Indenture, the “Indentures”) Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations.
Other Notes and Revolving Credit Facilities Revolving credit facilities with a combined credit limit of approximately Various industrial revenue bonds had combined outstanding balances of Covenants The Credit Agreement We were in compliance with all financial covenants in our Credit Agreement at December 31, 2019.
RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, Debt Maturities The following is a summary of aggregate maturities of
Note 10. Leases Our metals service center leases are comprised of processing and distribution facilities, equipment, trucks and trailers, ground leases and other leased spaces, such as depots, sales offices, storage and data centers. We also lease various office buildings, including our corporate headquarters in Los Angeles, California. Our leases of facilities and other spaces expire at various times through 2031 and our ground leases expire at various times through 2068. Nearly all of our leases are operating leases. Information regarding the insignificant amount of finance leases we have is not meaningful to an understanding of our lease obligations. The following is a summary of our lease cost:
Our operating lease costs include payments to various related parties that are not executive officers of the Company, in the amounts of $2.5 million, $4.1 million and $3.4 million in 2019, 2018 and 2017, respectively. These related party leases are for buildings leased to certain of the companies we have acquired and expire in various years through 2023. Supplemental cash flow and balance sheet information is presented below:
61 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Maturities of operating lease liabilities as of December 31, 2019 are as follows:
As previously presented in our consolidated financial statements for the year ended December 31, 2018, included in our Annual Report on Form 10-K, future minimum payments under previous lease accounting guidance for non-cancelable operating leases were as follows:
62 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Note Reliance and its subsidiaries file numerous consolidated and separate income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. We are no longer subject to U.S. federal tax examinations for years before 2015. Significant components of the provision for income taxes attributable to continuing operations were as follows:
Components of U.S. and international income before income taxes were as follows:
The reconciliation of income tax at the U.S. federal statutory tax
63 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Significant components of our deferred tax assets and liabilities are as follows:
As of December 31, The Company believes it is more likely than not that it will generate sufficient future taxable income to realize its deferred tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was enacted, which included significant changes to the taxation of U.S. corporations. These changes include, among other things, a reduction of the U.S. federal statutory rate from 35% to 21% effective in 2018, the implementation of a territorial tax system, a one-time tax in 2017 on
64 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, Unrecognized Tax Benefits We are under U.S. federal tax audit for 2017 and we are under audit by various state jurisdictions for years 2014 through 2018, but do not anticipate any material adjustments from these examinations. Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
As of December 31, Note We grant 65 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Stock Options Stock option activity under all the plans is as follows:
All stock options outstanding at December 31, There were Proceeds from stock options exercised under all stock option plans in
The following tabulation summarizes certain information concerning outstanding and exercisable options as of December 31,
Restricted Stock In 66 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, December 1, 2020 and December In
In A summary of the status of our unvested
The total fair value of RSUs vested during 2019, 2018 and 2017 was $56.5 million, $34.6 million and $40.1 million, respectively. Unrecognized Compensation Cost and Tax Benefits As of December 31, The tax benefit realized from our stock-based compensation plans in 2019, 2018 and 2017 was $5.5 million, $4.9 million and $8.4 million, respectively. Note Employee Stock Ownership Plan We have a tax-qualified employee stock ownership plan (the “ESOP”) that is a noncontributory plan that covers certain salaried and hourly employees of the Company. The amount of the annual contribution is at the discretion of the Board, except that the minimum amount must be sufficient to enable the ESOP trust to meet its current obligations. The Company ceased making annual contributions to the ESOP after the 2018 plan year. 67 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Defined Contribution Plans Effective in 1998, the Reliance Steel & Aluminum Co. Master 401(k) Plan (the “Master Plan”) was established, which combined several of the various 401(k) and Supplemental Executive Retirement Plans Effective January 1996, we adopted a Supplemental Executive Retirement Plan (“Reliance SERP”), which is a nonqualified pension plan that provides postretirement pension benefits to certain key officers of the Company. The Reliance SERP is administered by the Compensation Committee of the Board. Benefits are based upon the employees’ earnings. Life insurance policies were purchased for most individuals covered by the Reliance SERP. Separate
owned subsidiaries of the Company (together with the Reliance SERP, the “SERPs”), each of which provides postretirement pension benefits to certain Deferred Compensation Plan In December 2008, Multiemployer Plans Certain of our union employees participate in plans collectively bargained and maintained by multiple employers and a labor union. We do not recognize on our balance sheet any amounts relating to these plans. For 2019, 2018 and 2017 our contributions to these plans were $5.7 million, $5.4 million and $5.4 million, respectively. Some of the plans we participate in are in endangered, or critical and declining status and have adopted rehabilitation plans. If we were to withdraw our participation from these plans, we would be required to recognize a liability on our balance sheet and the amount could be significant. Defined Benefit Plans We, through certain subsidiaries, maintain qualified defined benefit pension plans for certain of our union employees (the “Defined Benefit Plans”). These plans generally provide benefits of stated amounts for each year of service or provide benefits based on the participant's hourly wage rate and years of service. The plans permit the sponsor, at any time, to amend or terminate the plans subject to union approval, if applicable. Certain of these plans were frozen in previous years. 68 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 We use a December 31 measurement date for our plans. The following is a summary of the status of the funding of the SERPs and Defined Benefit Plans:
As of December 31, 2019 and 2018, the following amounts were recognized on the balance sheet:
The accumulated benefit obligation for the SERPs was $42.0 million and $32.5 million as of December 31, 2019 and 2018, respectively. The accumulated benefit obligation for the Defined Benefit Plans was $116.2 million and $96.6 million as of December 31, 2019 and 2018, respectively. 69 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019
Following are the details of net periodic benefit cost related to the SERPs and Defined Benefit Plans:
Net periodic benefit cost related to the SERPs and Defined Benefit Plans is presented in our statements of income as summarized below:
Assumptions used to determine net periodic benefit cost are detailed below:
70 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Assumptions used to determine the benefit obligation are detailed below:
Employer contributions of $17.5 million are expected during 2020 to the SERPs and $1.8 million to the Defined Benefit Plans. Defined Benefit Plan Termination We have merged our frozen defined benefit pension plans into a single plan (the “Frozen Defined Benefit Plan”) and are proceeding with terminating the plan. Pursuant to the termination, the distribution of plan assets is anticipated to be completed in the second half of 2020. Participants of the Frozen Defined Benefit Plan can elect to receive their accrued benefit either in the form of a lump sum payment or an annuity contract that we purchase from an insurance company. The plan termination in 2020 is expected to result in plan settlement charges in an amount that will be determined based on market conditions when the distributions are made. As such, we are currently unable to reasonably estimate the timing or amount of the settlement charges. The Frozen Defined Benefit Plan had a projected benefit obligation of $49.8 million, plan assets with a fair value of $47.8 million and an accumulated comprehensive loss of $16.3 million as of December 31, 2019. Plan Assets and Investment Policy The weighted-average asset allocations of our Defined Benefit Plans by asset category are as follows:
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. Pursuant to the termination of the Frozen Defined Benefit Plan, 100% of the investments held by the Frozen Defined Plan were comprised of debt securities and cash and cash equivalents. The investment goal is a return on assets that is at least equal to the assumed actuarial rate of return over the long-term within reasonable and prudent levels of risk. We establish our estimated long-term return on plan assets assumption considering various factors including the targeted asset allocation percentages, historic returns and expected future returns. 71 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 The fair value measurements of our Defined Benefit Plan assets fall within the following levels of the fair value hierarchy as of December 31, 2019 and 2018:
72 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Summary Disclosures—SERPs and Defined Benefit Plans The following is a summary of benefit payments under the SERPs and Defined Benefit Plans, which reflect expected future employee service, as appropriate, expected to be paid in the periods indicated:
Supplemental Bonus Plan In connection with the acquisition of EMJ in April 2006, Reliance assumed the obligation resulting from EMJ’s settlement with the U.S. Department of Labor to contribute 258,006 shares of Reliance common stock to EMJ’s Supplemental Bonus Plan, a phantom stock bonus plan supplementing the EMJ Retirement Savings Plan. As of December 31, 2019, the remaining obligation to the EMJ Supplemental Bonus Plan consisted of the cash equivalent of 64,362 shares of Reliance common stock with a fair value of $7.7 million. The adjustments to reflect this obligation at fair value based on the closing price of our common stock at the end of each reporting period are included in Warehouse, delivery, selling, general and administrative expense. The expense (income) from mark to market adjustments to this obligation in each of the years ended December 31, 2019, 2018 and 2017 amounted to $3.3 million, ($0.8) million and $0.6 million, respectively. This obligation will be satisfied by future cash payments to participants upon their termination of employment. Contributions to Reliance Sponsored Retirement Plans Our expense for Reliance-sponsored retirement plans was as follows:
Note 14. Equity Common Stock We have paid regular quarterly cash dividends on our common stock for 60 consecutive years. Our Board of Directors increased the quarterly dividend to $0.45 per share from $0.425 in February 2017, increased it to $0.50 in February 2018, 73 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 increased it to $0.55 per share in February 2019 and increased it again in February 2020 to $0.625 per share. The holders of Reliance common stock are entitled to 1 vote per share on each matter submitted to a vote of stockholders. Share Repurchase Plan On October 23, 2018, our Board of Directors amended our share repurchase plan, increasing the total authorized number of shares available to be repurchased by 5.0 million and extending the duration of the plan through December 31, 2021. As of December 31, 2019, we had remaining authorization under the plan to purchase approximately 6.4 million shares, or approximately 10% of our current outstanding shares. We repurchase shares through open market purchases under plans complying with Rule 10b5-1 and Rule 10b-18 under the Securities Act of 1934, as amended. During 2019, we repurchased approximately 0.6 million shares of our common stock at an average cost of $84.33 per share, for a total of $50.0 million. During 2018, we repurchased approximately 6.1 million shares of our common stock at an average cost of $79.94 per share, for a total of $484.9 million. During 2017, we repurchased approximately 0.3 million shares of our common stock at an average cost of $74.27 per share, for a total of $25.0 million. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares. Preferred Stock We are authorized to issue 5,000,000 shares of preferred stock, par value $0.001 per share. NaN shares of our preferred stock are issued and outstanding. Our restated articles of incorporation provide that shares of preferred stock may be issued from time to time in 1 or more series by the Board. The Board can fix the preferences, conversion and other rights, voting powers, restrictions and limitations as to dividends, qualifications and terms and conditions of redemption of each series of preferred stock. The rights of preferred stockholders may supersede the rights of common stockholders. Accumulated Other Comprehensive Loss On October 1, 2018, we adopted accounting changes issued by the FASB that allow for a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from Tax Reform. As a result of the adoption, we reclassified $5.5 million of income tax benefit from accumulated other comprehensive loss to retained earnings. Accumulated other comprehensive loss included the following:
Foreign currency translation adjustments have not been adjusted for income taxes. Pension and postretirement benefit adjustments are net of taxes of $7.9 million and $6.5 million as of December 31, 2019 and December 31, 2018, respectively. Income tax effects are released from accumulated other comprehensive loss as obligations of the Defined Benefit Plans and SERPs are settled. 74 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Note 15. Other (Income) Expense, net Significant components of Other (income) expense, net are as follows:
Note 16. Commitments and Contingencies Purchase Commitments As of December 31, 2019, we had commitments to purchase minimum quantities of certain metal products, which we entered into to secure material for corresponding long-term sales commitments we have entered into with our customers. The total amount of the minimum commitments based on current pricing is estimated at approximately $78.2 million, with amounts in 2020, 2021 and thereafter being $42.1 million, $34.4 million and $1.7 million, respectively. Collective Bargaining Agreements As of December 31, 2019, approximately 11%, or 1,690, of our total employees are covered by 62 collective bargaining agreements at 52 of our different locations, which expire at various times over the next six years. Approximately 400 of our employees are covered by 18 different collective bargaining agreements that will expire during 2020. Environmental Contingencies We are subject to extensive and changing federal, state, local and foreign laws and regulations designed to protect the environment, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination. Our operations use minimal amounts of such substances. We believe we are in material compliance with environmental laws and regulations; however, we are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. Some of our owned or leased properties are located in industrial areas with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. In addition, we are currently involved with an environmental remediation project related to activities at former manufacturing operations of EMJ, our wholly owned subsidiary, that were sold many years prior to our acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time it owned the manufacturing operations that have covered costs incurred to date, and are expected to continue to cover the majority of the related costs. We do not expect that this obligation will have a material adverse impact on our consolidated financial position, results of operations or cash flows. 75 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Legal Matters From time to time, we are named as a defendant in legal actions. Generally, these actions arise in the ordinary course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse impact on our consolidated financial condition, results of operations or cash flows. We maintain general liability insurance against risks arising in the ordinary course of business. Note 17. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Potentially dilutive securities whose effect would have been antidilutive were not significant for all years presented. Note 18. Segment Information We have 1 reportable segment – metals service centers. All of our recent acquisitions were metals service centers and did not result in new reportable segments. Although a variety of products or services are sold at our various locations, in total, gross sales were comprised of the following in each of the three years ended December 31:
76 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 The following table summarizes consolidated financial information of our operations by geographic location based on where sales originated from:
Note 19. Impairment and Restructuring Charges The impairment and restructuring charges consisted of the following:
The 2018 charges mainly related to our decision to downsize one of our energy businesses due to changes in competitive factors for certain products we sell. 77 RELIANCE STEEL & ALUMINUM CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 Note 20. Quarterly Financial Information (Unaudited) The following is a summary of the unaudited quarterly results of operations for 2019 and 2018:
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the years shown elsewhere in this Annual Report on Form 10-K. 78 RELIANCE STEEL & ALUMINUM CO. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS (in millions)
See accompanying report of independent registered public accounting firm. 79 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision and with the participation of the Company’s management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2019 at a reasonable assurance level. Changes in Internal Control over Financial Reporting An evaluation was also performed under the supervision and with the participation of our management, including our CEO and CFO, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2019. The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their audit report, which is included herein. Item 9B. Other Information None. 80 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Opinion on Internal Control Over Financial Reporting We have audited Reliance Steel & Aluminum Co. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and related notes and financial statement schedule II of valuation and qualifying accounts (collectively, the consolidated financial statements), and our report dated February 27, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 81 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Los Angeles, California February 27, 2020 82 PART III Item 10. Directors, Executive Officers and Corporate Governance The narrative and tabular information included under the captions “Management,” and “Delinquent Section 16(a) Report” of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2020 (the “Proxy Statement”) are incorporated herein by reference. Item 11. Executive Compensation The narrative and tabular information, including footnotes thereto, included under the captions “Compensation Discussion & Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” of the Proxy Statement are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The narrative and tabular information, including footnotes thereto, included under the captions “Securities Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of the Proxy Statement are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The narrative information included under the captions “Related Person Transactions and Indemnification” and “Board of Directors and Corporate Governance” of the Proxy Statement is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The narrative and tabular information included under the caption “Ratification of Independent Registered Public Accounting Firm” of the Proxy Statement are incorporated herein by reference. 83 PART IV Item 15. Exhibits, Financial Statement Schedules (a)The following documents are filed as part of this report: (1)Financial Statements (included in Item 8). Report of Independent Registered Public Accounting Firm Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Quarterly Financial Information (Unaudited) (2)Financial Statement Schedules Schedule II—Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not significant or is included in the Consolidated Financial Statements or notes thereto or is not applicable. (3)Exhibits
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85 Item 16. Form 10-K Summary None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2020.
POWER OF ATTORNEY The officers and directors of Reliance Steel & Aluminum Co. whose signatures appear below hereby constitute and appoint James D. Hoffman and Karla R. Lewis, or either of them, to act severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for each of them in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated. 86
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