UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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.CO.
(Exact name of registrant as specified in its charter)
| | |
Delaware (State or other jurisdiction of incorporation or organization) | | 95-1142616 (I.R.S. Employer Identification No.) |
350 South Grand Avenue, Suite 5100
Los Angeles, California90071
(Address of principal executive offices, including zip code)
(213) (213) 687-7700
(Registrant’s telephone 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 |
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 every Interactive Data File required to be submitted 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 such files).
Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | |
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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 Exchange Act). Yes ☐ No ☒
As of October 26, 2018, 70,432,04625, 2019, 66,656,861 shares of the registrant’s common stock, $0.001 par value, were outstanding.
TABLE OF CONTENTS
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
RELIANCE STEEL & ALUMINUM CO.CO.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except sharenumber of shares which are reflected in thousands and par value amounts)value)
| | | | | |
| September 30, | | December 31, | ||
| 2019 |
| 2018* | ||
ASSETS | |||||
Current assets: | | | | | |
Cash and cash equivalents | $ | 166.0 | | $ | 128.2 |
Accounts receivable, less allowance for doubtful accounts of $21.3 at September 30, 2019 and $18.8 at December 31, 2018 | | 1,250.9 | | | 1,242.3 |
Inventories | | 1,669.5 | | | 1,817.1 |
Prepaid expenses and other current assets | | 69.6 | | | 81.5 |
Income taxes receivable | | 9.0 | | | 15.9 |
Total current assets | | 3,165.0 | | | 3,285.0 |
Property, plant and equipment: | | | | | |
Land | | 236.5 | | | 233.9 |
Buildings | | 1,183.7 | | | 1,158.9 |
Machinery and equipment | | 2,005.7 | | | 1,880.1 |
Accumulated depreciation | | (1,650.1) | | | (1,543.0) |
Property, plant and equipment, net | | 1,775.8 | | | 1,729.9 |
| | | | | |
Operating lease right-of-use assets | | 198.9 | | | — |
Goodwill | | 1,872.8 | | | 1,870.8 |
Intangible assets, net | | 1,040.7 | | | 1,072.0 |
Cash surrender value of life insurance policies, net | | 30.2 | | | 43.6 |
Other assets | | 47.5 | | | 43.6 |
Total assets | $ | 8,130.9 | | $ | 8,044.9 |
| | | | | |
LIABILITIES AND EQUITY | |||||
| | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 385.9 | | $ | 338.8 |
Accrued expenses | | 94.4 | | | 77.4 |
Accrued compensation and retirement costs | | 146.3 | | | 174.8 |
Accrued insurance costs | | 45.3 | | | 42.9 |
Current maturities of long-term debt and short-term borrowings | | 65.2 | | | 65.2 |
Current maturities of operating lease liabilities | | 51.4 | | | — |
Total current liabilities | | 788.5 | | | 699.1 |
Long-term debt | | 1,578.2 | | | 2,138.5 |
Operating lease liabilities | | 148.5 | | | — |
Long-term retirement costs | | 81.0 | | | 71.8 |
Other long-term liabilities | | 14.0 | | | 15.9 |
Deferred income taxes | | 439.0 | | | 440.1 |
Commitments and contingencies | | | | | |
Equity: | | | | | |
Preferred stock, $0.001 par value: | | | | | |
Authorized shares — 5,000 | | | | | |
None issued or outstanding | | — | | | — |
Common stock and additional paid-in capital, $0.001 par value: | | | | | |
Authorized shares — 200,000 | | | | | |
Issued and outstanding shares — 66,656 at September 30, 2019 and 66,882 at December 31, 2018 | | 114.9 | | | 136.4 |
Retained earnings | | 5,061.9 | | | 4,637.9 |
Accumulated other comprehensive loss | | (103.4) | | | (102.7) |
Total Reliance stockholders’ equity | | 5,073.4 | | | 4,671.6 |
Noncontrolling interests | | 8.3 | | | 7.9 |
Total equity | | 5,081.7 | | | 4,679.5 |
Total liabilities and equity | $ | 8,130.9 | | $ | 8,044.9 |
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| September 30, |
| December 31, | ||
| 2018 |
| 2017* | ||
ASSETS | |||||
Current assets: |
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|
Cash and cash equivalents | $ | 112.1 |
| $ | 154.4 |
Accounts receivable, less allowance for doubtful accounts of $21.5 at September 30, 2018 and $15.5 at December 31, 2017 |
| 1,425.8 |
|
| 1,087.3 |
Inventories |
| 2,083.7 |
|
| 1,726.0 |
Prepaid expenses and other current assets |
| 71.0 |
|
| 80.7 |
Income taxes receivable |
| — |
|
| 2.9 |
Total current assets |
| 3,692.6 |
|
| 3,051.3 |
Property, plant and equipment: |
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Land |
| 231.1 |
|
| 229.7 |
Buildings |
| 1,136.3 |
|
| 1,095.3 |
Machinery and equipment |
| 1,830.7 |
|
| 1,738.6 |
Accumulated depreciation |
| (1,516.7) |
|
| (1,407.3) |
Property, plant and equipment, net |
| 1,681.4 |
|
| 1,656.3 |
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Goodwill |
| 1,853.3 |
|
| 1,842.6 |
Intangible assets, net |
| 1,064.5 |
|
| 1,112.1 |
Cash surrender value of life insurance policies, net |
| 34.6 |
|
| 47.8 |
Other assets |
| 46.2 |
|
| 40.9 |
Total assets | $ | 8,372.6 |
| $ | 7,751.0 |
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LIABILITIES AND EQUITY | |||||
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Current liabilities: |
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Accounts payable | $ | 461.2 |
| $ | 346.7 |
Accrued expenses |
| 89.0 |
|
| 83.6 |
Accrued compensation and retirement costs |
| 156.7 |
|
| 139.3 |
Accrued insurance costs |
| 41.4 |
|
| 42.1 |
Current maturities of long-term debt and short-term borrowings |
| 89.1 |
|
| 92.0 |
Income taxes payable |
| 2.6 |
|
| — |
Total current liabilities |
| 840.0 |
|
| 703.7 |
Long-term debt |
| 1,981.1 |
|
| 1,809.4 |
Long-term retirement costs |
| 76.5 |
|
| 85.4 |
Other long-term liabilities |
| 14.3 |
|
| 11.8 |
Deferred income taxes |
| 430.4 |
|
| 440.8 |
Commitments and contingencies |
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Equity: |
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Preferred stock, $0.001 par value: |
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Authorized shares — 5,000,000 |
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None issued or outstanding |
| — |
|
| — |
Common stock and additional paid-in capital, $0.001 par value: |
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Authorized shares — 200,000,000 |
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Issued and outstanding shares – 71,443,121 at September 30, 2018 and 72,609,540 at December 31, 2017 |
| 495.6 |
|
| 594.6 |
Retained earnings |
| 4,583.0 |
|
| 4,144.1 |
Accumulated other comprehensive loss |
| (83.1) |
|
| (71.6) |
Total Reliance stockholders’ equity |
| 4,995.5 |
|
| 4,667.1 |
Noncontrolling interests |
| 34.8 |
|
| 32.8 |
Total equity |
| 5,030.3 |
|
| 4,699.9 |
Total liabilities and equity | $ | 8,372.6 |
| $ | 7,751.0 |
* Amounts were derived from audited financial statements.
See accompanying notes to unaudited consolidated financial statements.
1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
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| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net sales | $ | 2,974.5 |
| $ | 2,450.1 |
| $ | 8,720.5 |
| $ | 7,344.6 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation and amortization shown below) |
| 2,140.2 |
|
| 1,764.6 |
|
| 6,148.8 |
|
| 5,235.4 |
Warehouse, delivery, selling, general and administrative |
| 531.0 |
|
| 470.0 |
|
| 1,586.3 |
|
| 1,422.1 |
Depreciation and amortization |
| 53.4 |
|
| 54.0 |
|
| 161.8 |
|
| 164.2 |
Impairment of long-lived assets |
| 35.5 |
|
| 2.8 |
|
| 35.5 |
|
| 2.8 |
|
| 2,760.1 |
|
| 2,291.4 |
|
| 7,932.4 |
|
| 6,824.5 |
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Operating income |
| 214.4 |
|
| 158.7 |
|
| 788.1 |
|
| 520.1 |
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Other (income) expense: |
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Interest expense |
| 22.0 |
|
| 19.1 |
|
| 62.6 |
|
| 54.9 |
Other (income) expense, net |
| (2.5) |
|
| (2.6) |
|
| (1.2) |
|
| 2.1 |
Income before income taxes |
| 194.9 |
|
| 142.2 |
|
| 726.7 |
|
| 463.1 |
Income tax provision |
| 44.6 |
|
| 43.2 |
|
| 172.2 |
|
| 145.9 |
Net income |
| 150.3 |
|
| 99.0 |
|
| 554.5 |
|
| 317.2 |
Less: Net income attributable to noncontrolling interests |
| 2.0 |
|
| 1.7 |
|
| 6.4 |
|
| 5.2 |
Net income attributable to Reliance | $ | 148.3 |
| $ | 97.3 |
| $ | 548.1 |
| $ | 312.0 |
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Earnings per share attributable to Reliance stockholders: |
|
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Diluted | $ | 2.03 |
| $ | 1.32 |
| $ | 7.49 |
| $ | 4.24 |
Basic | $ | 2.06 |
| $ | 1.33 |
| $ | 7.57 |
| $ | 4.28 |
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Cash dividends per share | $ | 0.50 |
| $ | 0.45 |
| $ | 1.50 |
| $ | 1.35 |
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net sales | $ | 2,685.9 | | $ | 2,974.5 | | $ | 8,526.0 | | $ | 8,720.5 |
| | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | | 1,871.2 | | | 2,140.2 | | | 5,990.8 | | | 6,148.8 |
Warehouse, delivery, selling, general and administrative | | 518.7 | | | 531.0 | | | 1,582.2 | | | 1,586.3 |
Depreciation and amortization | | 54.8 | | | 53.4 | | | 163.2 | | | 161.8 |
Impairment of long-lived assets | | — | | | 35.5 | | | 1.2 | | | 35.5 |
| | 2,444.7 | | | 2,760.1 | | | 7,737.4 | | | 7,932.4 |
| | | | | | | | | | | |
Operating income | | 241.2 | | | 214.4 | | | 788.6 | | | 788.1 |
| | | | | | | | | | | |
Other (income) expense: | | | | | | | | | | | |
Interest expense | | 20.5 | | | 22.0 | | | 68.4 | | | 62.6 |
Other expense (income) , net | | 2.3 | | | (2.5) | | | 0.5 | | | (1.2) |
Income before income taxes | | 218.4 | | | 194.9 | | | 719.7 | | | 726.7 |
Income tax provision | | 54.5 | | | 44.6 | | | 179.9 | | | 172.2 |
Net income | | 163.9 | | | 150.3 | | | 539.8 | | | 554.5 |
Less: Net income attributable to noncontrolling interests | | 1.2 | | | 2.0 | | | 3.9 | | | 6.4 |
Net income attributable to Reliance | $ | 162.7 | | $ | 148.3 | | $ | 535.9 | | $ | 548.1 |
| | | | | | | | | | | |
Earnings per share attributable to Reliance stockholders: | | | | | | | | | | | |
Diluted | $ | 2.40 | | $ | 2.03 | | $ | 7.90 | | $ | 7.49 |
Basic | $ | 2.44 | | $ | 2.06 | | $ | 8.01 | | $ | 7.57 |
| | | | | | | | | | | |
Shares used in computing earnings per share: | | | | | | | | | | | |
Diluted | | 67,704 | | | 72,981 | | | 67,868 | | | 73,137 |
Basic | | 66,656 | | | 71,940 | | | 66,941 | | | 72,364 |
| | | | | | | | | | | |
Cash dividends per share | $ | 0.55 | | $ | 0.50 | | $ | 1.65 | | $ | 1.50 |
See accompanying notes to unaudited consolidated financial statements.
2
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
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|
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|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net income | $ | 150.3 |
| $ | 99.0 |
| $ | 554.5 |
| $ | 317.2 |
Other comprehensive income (loss): |
|
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|
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|
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Foreign currency translation gain (loss) |
| 2.6 |
|
| 10.5 |
|
| (11.5) |
|
| 24.5 |
Pension and postretirement benefit adjustments, net of tax |
| — |
|
| — |
|
| — |
|
| 2.3 |
Total other comprehensive income (loss) |
| 2.6 |
|
| 10.5 |
|
| (11.5) |
|
| 26.8 |
Comprehensive income |
| 152.9 |
|
| 109.5 |
|
| 543.0 |
|
| 344.0 |
Less: Comprehensive income attributable to noncontrolling interests |
| 2.0 |
|
| 1.7 |
|
| 6.4 |
|
| 5.2 |
Comprehensive income attributable to Reliance | $ | 150.9 |
| $ | 107.8 |
| $ | 536.6 |
| $ | 338.8 |
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | $ | 163.9 | | $ | 150.3 | | $ | 539.8 | | $ | 554.5 |
Other comprehensive (loss) income: | | | | | | | | | | | |
Foreign currency translation (loss) gain | | (8.7) | | | 2.6 | | | (0.7) | | | (11.5) |
Total other comprehensive (loss) income | | (8.7) | | | 2.6 | | | (0.7) | | | (11.5) |
Comprehensive income | | 155.2 | | | 152.9 | | | 539.1 | | | 543.0 |
Less: Comprehensive income attributable to noncontrolling interests | | 1.2 | | | 2.0 | | | 3.9 | | | 6.4 |
Comprehensive income attributable to Reliance | $ | 154.0 | | $ | 150.9 | | $ | 535.2 | | $ | 536.6 |
See accompanying notes to unaudited consolidated financial statements.
3
RELIANCE STEEL & ALUMINUMALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY
(in millions)millions, except number of shares which are reflected in thousands and per share amounts)
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| Nine Months Ended | ||||
| September 30, | ||||
| 2018 |
| 2017 | ||
Operating activities: |
|
|
|
|
|
Net income | $ | 554.5 |
| $ | 317.2 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization expense |
| 161.8 |
|
| 164.2 |
Impairment of long-lived assets |
| 35.5 |
|
| 2.8 |
Provision for uncollectible accounts |
| 8.4 |
|
| 6.3 |
Deferred income tax benefit |
| (9.9) |
|
| (4.7) |
Gain on sales of property, plant and equipment |
| (1.2) |
|
| (8.4) |
Stock-based compensation expense |
| 33.8 |
|
| 23.3 |
Other |
| 6.8 |
|
| 4.9 |
Changes in operating assets and liabilities (excluding effect of businesses acquired): |
|
|
|
|
|
Accounts receivable |
| (339.6) |
|
| (208.9) |
Inventories |
| (352.2) |
|
| (235.5) |
Prepaid expenses and other assets |
| 9.9 |
|
| 12.6 |
Accounts payable and other liabilities |
| 125.5 |
|
| 124.5 |
Net cash provided by operating activities |
| 233.3 |
|
| 198.3 |
|
|
|
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|
|
Investing activities: |
|
|
|
|
|
Purchases of property, plant and equipment |
| (152.6) |
|
| (118.1) |
Acquisitions, net of cash acquired |
| (55.6) |
|
| (1.3) |
Proceeds from sales of property, plant and equipment |
| 8.8 |
|
| 14.0 |
Other |
| 10.4 |
|
| 5.6 |
Net cash used in investing activities |
| (189.0) |
|
| (99.8) |
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
Net short-term debt (repayments) borrowings |
| (24.6) |
|
| 3.6 |
Proceeds from long-term debt borrowings |
| 941.0 |
|
| 674.0 |
Principal payments on long-term debt |
| (752.5) |
|
| (634.5) |
Dividends and dividend equivalents paid |
| (110.5) |
|
| (99.3) |
Exercise of stock options |
| 2.8 |
|
| 3.4 |
Share repurchases |
| (130.1) |
|
| — |
Other |
| (9.9) |
|
| (5.3) |
Net cash used in financing activities |
| (83.8) |
|
| (58.1) |
Effect of exchange rate changes on cash and cash equivalents |
| (2.8) |
|
| 7.0 |
(Decrease) increase in cash and cash equivalents |
| (42.3) |
|
| 47.4 |
Cash and cash equivalents at beginning of year |
| 154.4 |
|
| 122.8 |
Cash and cash equivalents at end of period | $ | 112.1 |
| $ | 170.2 |
|
|
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|
|
|
Supplemental cash flow information: |
|
|
|
|
|
Interest paid during the period | $ | 50.6 |
| $ | 44.2 |
Income taxes paid during the period, net | $ | 171.4 |
| $ | 135.2 |
|
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|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
Debt assumed in connection with acquisition | $ | 3.3 |
| $ | — |
| | | | | | | | | | | | | | | | | |
| | Reliance Stockholders’ Equity | | | | | | | |||||||||
| Common Stock | | | | | Accumulated | | | | | | | |||||
| and Additional | | | | | Other | | Non- | | | | ||||||
| Paid-In Capital | | Retained | | Comprehensive | | controlling | | | | |||||||
| | Shares |
| Amount |
| Earnings |
| (Loss) Income |
| Interests |
| Total | |||||
Balance at January 1, 2018 | | 72,610 | | $ | 594.6 | | $ | 4,144.1 | | $ | (71.6) | | $ | 32.8 | | $ | 4,699.9 |
Net income | | — | | | — | | | 169.0 | | | — | | | 2.1 | | | 171.1 |
Other comprehensive loss | | — | | | — | | | — | | | (2.9) | | | — | | | (2.9) |
Dividends to noncontrolling interest holders | | — | | | — | | | — | | | — | | | (1.8) | | | (1.8) |
Stock-based compensation, net | | 269 | | | 1.0 | | | — | | | — | | | — | | | 1.0 |
Stock options exercised | | 48 | | | 2.8 | | | — | | | — | | | — | | | 2.8 |
Repurchase of common shares | | (584) | | | (49.3) | | | — | | | — | | | — | | | (49.3) |
Cash dividends — $0.50 per share and dividend equivalents | | — | | | — | | | (37.2) | | | — | | | — | | | (37.2) |
Balance at March 31, 2018 | | 72,343 | | | 549.1 | | | 4,275.9 | | | (74.5) | | | 33.1 | | | 4,783.6 |
Net income | | — | | | — | | | 230.8 | | | — | | | 2.3 | | | 233.1 |
Other comprehensive loss | | — | | | — | | | — | | | (11.2) | | | — | | | (11.2) |
Dividends to noncontrolling interest holders | | — | | | — | | | — | | | — | | | (0.8) | | | (0.8) |
Stock-based compensation, net | | 15 | | | 12.9 | | | — | | | — | | | — | | | 12.9 |
Repurchase of common shares | | (8) | | | (0.7) | | | — | | | — | | | — | | | (0.7) |
Cash dividends — $0.50 per share and dividend equivalents | | — | | | — | | | (36.1) | | | — | | | — | | | (36.1) |
Balance at June 30, 2018 | | 72,350 | | | 561.3 | | | 4,470.6 | | | (85.7) | | | 34.6 | | | 4,980.8 |
Net income | | — | | | — | | | 148.3 | | | — | | | 2.0 | | | 150.3 |
Other comprehensive income | | — | | | — | | | — | | | 2.6 | | | — | | | 2.6 |
Dividends to noncontrolling interest holders | | — | | | — | | | — | | | — | | | (1.8) | | | (1.8) |
Stock-based compensation, net | | 4 | | | 14.4 | | | — | | | — | | | — | | | 14.4 |
Repurchase of common shares | | (911) | | | (80.1) | | | — | | | — | | | — | | | (80.1) |
Cash dividends — $0.50 per share and dividend equivalents | | — | | | — | | | (35.9) | | | — | | | — | | | (35.9) |
Balance at September 30, 2018 | | 71,443 | | $ | 495.6 | | $ | 4,583.0 | | $ | (83.1) | | $ | 34.8 | | $ | 5,030.3 |
| | | | | | | | | | | | | | | | | |
Balance at January 1, 2019 | | 66,882 | | $ | 136.4 | | $ | 4,637.9 | | $ | (102.7) | | $ | 7.9 | | $ | 4,679.5 |
Net income | | — | | | — | | | 190.1 | | | — | | | 1.5 | | | 191.6 |
Other comprehensive income | | — | | | — | | | — | | | 6.8 | | | — | | | 6.8 |
Stock-based compensation, net | | 333 | | | (1.3) | | | — | | | — | | | — | | | (1.3) |
Stock options exercised | | 20 | | | 0.8 | | | — | | | — | | | — | | | 0.8 |
Cash dividends — $0.55 per share and dividend equivalents | | — | | | — | | | (38.2) | | | — | | | — | | | (38.2) |
Balance at March 31, 2019 | | 67,235 | | | 135.9 | | | 4,789.8 | | | (95.9) | | | 9.4 | | | 4,839.2 |
Net income | | — | | | — | | | 183.1 | | | — | | | 1.2 | | | 184.3 |
Other comprehensive income | | — | | | — | | | — | | | 1.2 | | | — | | | 1.2 |
Dividends to noncontrolling interest holders | | — | | | — | | | — | | | — | | | (1.7) | | | (1.7) |
Noncontrolling interest purchased | | — | | | — | | | — | | | — | | | (0.4) | | | (0.4) |
Stock-based compensation, net | | 12 | | | 13.8 | | | — | | | — | | | — | | | 13.8 |
Repurchase of common shares | | (593) | | | (50.0) | | | — | | | — | | | — | | | (50.0) |
Cash dividends — $0.55 per share and dividend equivalents | | — | | | — | | | (36.9) | | | — | | | — | | | (36.9) |
Balance at June 30, 2019 | | 66,654 | | | 99.7 | | | 4,936.0 | | | (94.7) | | | 8.5 | | | 4,949.5 |
Net income | | — | | | — | | | 162.7 | | | — | | | 1.2 | | | 163.9 |
Other comprehensive loss | | — | | | — | | | — | | | (8.7) | | | — | | | (8.7) |
Dividends to noncontrolling interest holders | | — | | | — | | | — | | | — | | | (1.4) | | | (1.4) |
Stock-based compensation, net | | 2 | | | 15.2 | | | — | | | — | | | — | | | 15.2 |
Cash dividends — $0.55 per share and dividend equivalents | | — | | | — | | | (36.8) | | | — | | | — | | | (36.8) |
Balance at September 30, 2019 | | 66,656 | | $ | 114.9 | | $ | 5,061.9 | | $ | (103.4) | | $ | 8.3 | | $ | 5,081.7 |
See accompanying notes to unaudited consolidated financial statements.
4
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | |
| Nine Months Ended | ||||
| September 30, | ||||
| 2019 |
| 2018 | ||
Operating activities: | | | | | |
Net income | $ | 539.8 | | $ | 554.5 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization expense | | 163.2 | | | 161.8 |
Impairment of long-lived assets | | 1.2 | | | 35.5 |
Provision for uncollectible accounts | | 5.2 | | | 8.4 |
Stock-based compensation expense | | 37.3 | | | 33.8 |
Other | | 4.9 | | | (4.3) |
Changes in operating assets and liabilities (excluding effect of businesses acquired): | | | | | |
Accounts receivable | | (14.2) | | | (339.6) |
Inventories | | 147.0 | | | (352.2) |
Prepaid expenses and other assets | | 59.7 | | | 9.9 |
Accounts payable and other liabilities | | 10.0 | | | 125.5 |
Net cash provided by operating activities | | 954.1 | | | 233.3 |
| | | | | |
Investing activities: | | | | | |
Purchases of property, plant and equipment | | (182.8) | | | (152.6) |
Acquisitions, net of cash acquired | | (1.0) | | | (55.6) |
Other | | 11.9 | | | 19.2 |
Net cash used in investing activities | | (171.9) | | | (189.0) |
| | | | | |
Financing activities: | | | | | |
Net short-term debt repayments | | — | | | (24.6) |
Proceeds from long-term debt borrowings | | 742.0 | | | 941.0 |
Principal payments on long-term debt | | (1,304.3) | | | (752.5) |
Dividends and dividend equivalents paid | | (113.3) | | | (110.5) |
Share repurchases | | (50.0) | | | (130.1) |
Other | | (13.2) | | | (7.1) |
Net cash used in financing activities | | (738.8) | | | (83.8) |
Effect of exchange rate changes on cash and cash equivalents | | (5.6) | | | (2.8) |
Increase (decrease) in cash and cash equivalents | | 37.8 | | | (42.3) |
Cash and cash equivalents at beginning of year | | 128.2 | | | 154.4 |
Cash and cash equivalents at end of period | $ | 166.0 | | $ | 112.1 |
| | | | | |
Supplemental cash flow information: | | | | | |
Interest paid during the period | $ | 57.2 | | $ | 50.6 |
Income taxes paid during the period, net | $ | 173.7 | | $ | 171.4 |
| | | | | |
Non-cash investing and financing activities: | | | | | |
Debt assumed in connection with acquisition | $ | — | | $ | 3.3 |
See accompanying notes to unaudited consolidated financial statements.
5
RELIANCE STEEL & ALUMINUM CO.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20182019
Note 1. Basis of Presentation
Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, our financial statements reflect all adjustments, consisting onlywhich are of a normal recurring adjustmentsnature, necessary for a fair presentation with respect to the interimof financial statements have been included.for interim periods in accordance with U.S. GAAP. The results of operations for the nine months ended September 30, 20182019 are not necessarily indicative of the results for the full year ending December 31, 2018.2019. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2017,2018, included in the Reliance Steel & Aluminum Co. (“Reliance”,Reliance,” the “Company”, “we”,“Company,” “we,” “our” or “us”) Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Our consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. Our investments in unconsolidated subsidiaries are recorded under the equity method of accounting.
Note 2. Impact of Recently Issued Accounting Guidance
Impact of Recently Issued Accounting Standards—Adopted
Revenue from Contracts with CustomersLeases—In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting changes that replaced most of the detailed guidance on revenue recognition that previously existed under U.S. GAAP. Under the new standard, an entity should recognize revenue when goods or services are transferred to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.We adopted these changes as of January 1, 2018 using the modified retrospective method. See Note 4—“Revenues” for further details.
Classification of Certain Cash Receipts and Cash Payments—In August 2016, the FASB issued accounting changes that clarify the presentation and classification of certain cash receipts and payments in the statement of cash flows with the objective of reducing the existing diversity in practice with respect to eight types of cash flows. We adopted these changes as of January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements.
Impact of Recently Issued Accounting Standards—Not Yet Adopted
Leases—In February 2016, the FASB issued accounting changes that require lessees to recognize most long-term leases on the balance sheet through the recognition of a right-of-use asset and a lease liability using a modified retrospective transition method.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 and recognize a cumulative-effect adjustment to beginning retained earnings while continuing to present all prior periods under previous lease accounting guidance. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2018, or January 1, 2019 for the Company. Early adoption is permitted.guidance.
5
We have implemented a lease management system and are updating our accounting policies and internal controls that would be impacted byadopted the new guidance. We anticipate adopting this new standard on January 1, 2019 using the optional transition method and the available practical expedients. We expectThe 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 these accounting changes will materially increase ourthe new lease standard resulted in the recognition of $186.3 million of operating lease right-of-use assets and $187.1 million of operating lease liabilities but will not have a material impact on our net income, stockholders’ equity, or cash flows. We are unable to quantify the ultimate impact of adopting this new standard at this time as the actual impact will depend on the total amount of our lease commitments as of the adoption date.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income—In February 2018, the FASB issued accounting changes that allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. The adoption of this standard willdid not have a material impact on our consolidated financial statements.
3. Acquisitions
On August 1, 2018, we acquired KMS Fab, LLC and KMS South, Inc. (collectively, “KMS” or the “KMS Companies”). The KMS Companies are headquartered in Luzerne, Pennsylvania. The KMS Companies specialize in precision sheet metal fabrication ranging from prototypes to large production runs which utilize a wide variety of metals and fabrication methods including laser cutting, stamping, turret punching, machining, powder coating and welding. KMS’ net sales during the period from August 1, 2018 to September 30, 2018 were $4.6 million.
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 during the period from March 1, 2018 to September 30, 2018 were $16.4 million.
On October 2, 2017, through our wholly owned subsidiary Diamond Manufacturing Company, we acquired Ferguson Perforating Company (“Ferguson”). Ferguson, headquartered in Providence, Rhode Island, specializes in manufacturing highly engineered and complex perforated metal parts for diverse end markets including industrial machinery, automotive, aerospace, sugar products and consumer electronics manufacturers. Ferguson’s net sales were $29.5 million for the nine months ended September 30, 2018.
We funded our 2018 and 2017 acquisitions with borrowings on our revolving credit facility and cash on hand.
The acquisitions discussed in this note have been accounted for under the acquisition method of accounting and, accordingly, the respective purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of each acquisition. The accompanying consolidated statements of income, include the revenues and expensesequity or cash flows. For further discussion of each acquisition since its respective acquisition date. The consolidated balance sheets reflect the allocation of each acquisition’s purchase price as of September 30, 2018 and December 31, 2017, as applicable. The purchase price allocations for our acquisitions of KMS and DuBose are preliminary and are pending the completion of various pre-acquisition period income tax returns. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date.leases, see Note 7 – “Leases.”
4. Revenues
Revenue from Contracts with Customers
On January 1, 2018, we adopted new accounting guidance relating to the recognition of revenue from contracts with our customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We did not record a cumulative-effect adjustment to retained earnings upon adoption and comparable period financial statement amounts have not been adjusted. Our reported results for the nine months ended September 30, 2018 would not have been different if reported under the previous accounting standard.
6
Note 3. Revenues
Revenue Recognition
We recognize revenue when control of metal products or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. There are no significant judgments or estimates made to determine the amount or timing of our reported revenues. The amount of transaction price associated with unperformed performance obligations and the amount of our contract balances is not significant.
The following table presents our sales disaggregated by product and service. Certain sales taxes orand value-added taxes collected from customers are excluded from our reported net sales.
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| |||||||||||
| Three Months Ended |
| Nine Months Ended | |||||||||||||||||||
| September 30, |
| September 30, | |||||||||||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||
| (in millions) | |||||||||||||||||||||
Carbon Steel | $ | 1,637.6 |
| $ | 1,319.5 |
| $ | 4,741.0 |
| $ | 3,936.8 | |||||||||||
| | | | | | | | | | | | |||||||||||
| Three Months Ended | | Nine Months Ended | |||||||||||||||||||
| September 30, | | September 30, | |||||||||||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||||||
Carbon steel | $ | 1,416.1 | | $ | 1,637.6 | | $ | 4,542.4 | | $ | 4,741.0 | |||||||||||
Aluminum |
| 559.9 |
|
| 475.3 |
|
| 1,680.1 |
|
| 1,446.2 | | 532.4 | | | 559.9 | | | 1,662.6 | | | 1,680.1 |
Stainless Steel |
| 418.7 |
|
| 343.3 |
|
| 1,250.6 |
|
| 1,038.6 | |||||||||||
Stainless steel | | 388.7 | | | 418.7 | | | 1,202.4 | | | 1,250.6 | |||||||||||
Alloy |
| 171.2 |
|
| 149.3 |
|
| 512.7 |
|
| 440.4 | | 160.7 | | | 171.2 | | | 515.0 | | | 512.7 |
Toll processing and logistics |
| 106.5 |
|
| 85.8 |
|
| 311.9 |
|
| 258.8 | | 111.8 | | | 106.5 | | | 343.6 | | | 311.9 |
Other and eliminations |
| 80.6 |
|
| 76.9 |
|
| 224.2 |
|
| 223.8 | | 76.2 | | | 80.6 | | | 260.0 | | | 224.2 |
Total | $ | 2,974.5 |
| $ | 2,450.1 |
| $ | 8,720.5 |
| $ | 7,344.6 | $ | 2,685.9 | | $ | 2,974.5 | | $ | 8,526.0 | | $ | 8,720.5 |
Metal Sales
Note 4. Goodwill
Metal product sales represented approximately 94% of our revenues for the nine months ended September 30, 2018. 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 one performance obligation: sale of processed or unprocessed metal product. Control of the metal products we sell transfers to our customers upon delivery for orders with FOB destination terms or upon shipment for orders with FOB shipping point terms. Shipping and handling charges to our customers are included in net sales. We account for all shipping and handling of our products as fulfillment activities and not as a promised good or service. Costs incurred in connection with the shipping and handling of our products are typically included in operating expenses whether we use a third-party carrier or our own trucks. Shipment and delivery of our orders generally occur on the same day due to the close proximity of our customers and our metals service center locations.
Toll Processing and Logistics
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. These 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.
7
5. Goodwill
The change in the carrying amount of goodwill is as follows:
|
|
|
| (in millions) | |
Balance at January 1, 2018 | $ | 1,842.6 |
Acquisitions |
| 12.8 |
Effect of foreign currency translation |
| (2.1) |
Balance at September 30, 2018 | $ | 1,853.3 |
| | |
| (in millions) | |
Balance at January 1, 2019 | $ | 1,870.8 |
Acquisition | | 1.0 |
Purchase price allocation adjustments | | (0.5) |
Foreign currency translation gain | | 1.5 |
Balance at September 30, 2019 | $ | 1,872.8 |
We had no0 accumulated impairment losses related to goodwill at September 30, 2018. 2019.
The goodwill recorded from our acquisitions of KMS and DuBose is tax deductible.
6.Note 5. Intangible Assets, net
Intangible assets, net consisted of the following:
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| September 30, 2018 |
| December 31, 2017 | |||||||||||||||||||||
| Weighted Average |
| Gross |
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| Gross |
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| |||||||||||||||
| Amortizable |
| Carrying |
| Accumulated |
| Carrying |
| Accumulated | |||||||||||||||||
| Life in Years |
| Amount |
| Amortization |
| Amount |
| Amortization | |||||||||||||||||
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| (in millions) | |||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | September 30, 2019 | | December 31, 2018 | |||||||||||||||||||||
| Weighted Average | | Gross | | | | | Gross | | | | |||||||||||||||
| Amortizable | | Carrying | | Accumulated | | Carrying | | Accumulated | |||||||||||||||||
| Life in Years |
| Amount |
| Amortization |
| Amount |
| Amortization | |||||||||||||||||
| | | (in millions) | |||||||||||||||||||||||
Intangible assets subject to amortization: |
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|
|
|
| | | | | | | | | | | | | |
Covenants not to compete | 4.7 |
| $ | 0.9 |
| $ | (0.5) |
| $ | 0.8 |
| $ | (0.4) | 4.8 | | $ | 0.8 | | $ | (0.5) | | $ | 0.8 | | $ | (0.4) |
Customer lists/relationships | 15.1 |
|
| 698.2 |
|
| (384.6) |
|
| 745.0 |
|
| (391.3) | 15.0 | | | 708.7 | | | (426.4) | | | 707.3 | | | (393.4) |
Software | 10.0 |
|
| 8.1 |
|
| (8.1) |
|
| 8.1 |
|
| (8.1) | 10.0 | | | 8.1 | | | (8.1) | | | 8.1 | | | (8.1) |
Other | 7.6 |
|
| 1.0 |
|
| (0.9) |
|
| 6.3 |
|
| (5.9) | 7.3 | | | 1.1 | | | (0.9) | | | 1.0 | | | (0.9) |
|
|
|
| 708.2 |
|
| (394.1) |
|
| 760.2 |
|
| (405.7) | |||||||||||||
| | | | 718.7 | | | (435.9) | | | 717.2 | | | (402.8) | |||||||||||||
Intangible assets not subject to amortization: |
|
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|
|
|
|
|
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| | | | | | | | | | | | | |
Trade names |
|
|
| 750.4 |
|
| — |
|
| 757.6 |
|
| — | | | | 757.9 | | | — | | | 757.6 | | | — |
|
|
| $ | 1,458.6 |
| $ | (394.1) |
| $ | 1,517.8 |
| $ | (405.7) | |||||||||||||
| | | $ | 1,476.6 | | $ | (435.9) | | $ | 1,474.8 | | $ | (402.8) |
Intangible assets recorded in connection with our acquisitions of KMS and DuBose were $22.9 million as of September 30, 2018 (see Note 3—“Acquisitions”). A total of $10.0 million was allocated to the trade names acquired, which is not subject to amortization.
We recognized amortizationAmortization expense for intangible assets of $35.1was $32.3 million and $38.9$35.1 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. Foreign currency translation lossesgains related to intangible assets, net, were $1.0 million for the nine months ended September 30, 2019 compared to $1.5 million duringof foreign currency translation losses for the nine months ended September 30, 2018.
7
During the three-monththree months and nine-month periodsnine months ended September 30, 2018, we recognized impairment losses of $16.5 million and $16.7 million on our trade name and customer relationship intangible assets, respectively, related to one of our energy businesses. See Note 12—“Impairment and Restructuring Charges” for further discussion of our impairment losses.
8
The following is a summary of estimated aggregatefuture amortization expense for the remaining three months of 20182019 and each of the succeeding five years:
|
|
| ||
| (in millions) | |||
2018 (remaining three months) | $ | 10.5 | ||
2019 |
| 41.9 | ||
| | | ||
| (in millions) | |||
2019 (remaining three months) | $ | 10.8 | ||
2020 |
| 41.9 | | 43.1 |
2021 |
| 40.2 | | 41.4 |
2022 |
| 35.5 | | 36.7 |
2023 |
| 29.5 | | 30.7 |
2024 | | 27.2 |
Note 6. Debt
7. Debt
Debt consisted of the following:
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|
|
| |||||
| September 30, |
| December 31, | |||||||
| 2018 |
| 2017 | |||||||
| (in millions) | |||||||||
| | | | | | |||||
| September 30, | | December 31, | |||||||
| 2019 |
| 2018 | |||||||
| (in millions) | |||||||||
Unsecured revolving credit facility due September 30, 2021 | $ | 753.0 |
| $ | 538.0 | $ | 408.0 | | $ | 925.0 |
Unsecured term loan due from December 31, 2018 to September 30, 2021 |
| 540.0 |
|
| 562.5 | |||||
Unsecured term loan due from December 31, 2019 to September 30, 2021 | | 480.0 | | | 525.0 | |||||
Senior unsecured notes due April 15, 2023 |
| 500.0 |
|
| 500.0 | | 500.0 | | | 500.0 |
Senior unsecured notes due November 15, 2036 |
| 250.0 |
|
| 250.0 | | 250.0 | | | 250.0 |
Other notes and revolving credit facilities |
| 38.3 |
|
| 64.0 | | 13.8 | | | 14.2 |
Total |
| 2,081.3 |
|
| 1,914.5 | | 1,651.8 | | | 2,214.2 |
Less: unamortized discount and debt issuance costs |
| (11.1) |
|
| (13.1) | | (8.4) | | | (10.5) |
Less: amounts due within one year and short-term borrowings |
| (89.1) |
|
| (92.0) | | (65.2) | | | (65.2) |
Total long-term debt | $ | 1,981.1 |
| $ | 1,809.4 | $ | 1,578.2 | | $ | 2,138.5 |
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 up to an additional $500.0 million at our request, subject to approval of the lenders and certain other customary conditions. The term loan due September 30, 2021 amortizes in quarterly installments, with an annual amortization of 10% until June 2021, with the balance to be paid at maturity. Interest on borrowings fromunder the revolving credit facility and term loanCredit Agreement at September 30, 20182019 was at variable rates based on LIBOR plus 1.25%1.00% or the bank prime rate plus 0.25% and includedwe pay a commitment fee at an annual rate of 0.15%0.125% on the unused portion of the revolving credit facility. During the third quarter of 2019, applicable margins were lowered by 25 basis points and our commitment fees were reduced per the terms of the Credit Agreement as a result of a decrease in our calculated leverage ratio. The applicable margins over LIBOR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty.
Weighted average interest rates on borrowings outstanding on the revolving credit facility were 3.54%3.20% and 2.96%3.86% as of September 30, 20182019 and December 31, 2017,2018, respectively. Weighted average interest rates on borrowings outstanding on the term loan were 3.49%3.04% and 2.82%3.77% as of September 30, 20182019 and December 31, 2017,2018, respectively. As of September 30, 2018,2019, we had $753.0$408.0 million of outstanding borrowings, $40.8$40.6 million of letters of credit issued and $706.2 million$1.05 billion available for borrowing on the revolving credit facility.
8
Senior Unsecured Notes
On November 20, 2006, we entered into an indenture (the “2006 Indenture”), for the issuance of $600.0 million of unsecured debt securities. The total debt issued was comprised of two2 tranches, (a) $350.0 million aggregate principal 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.
9
On April 12, 2013, we entered into an indenture (the “2013 Indenture” and, together with the 2006 Indenture, the “Indentures”), for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, maturing on April 15, 2023.
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. If we experience a change in control accompanied by a downgrade in our credit rating, we will be required to make an offer to repurchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest.
Other Notes and Revolving Credit Facilities
Revolving credit facilities with a combined credit limit of approximately $62.1$9.8 million are in place for operations in Asia and Europe with combined outstanding balances of $28.5$4.6 million and $53.9$4.7 million as of September 30, 20182019 and December 31, 2017,2018, respectively.
Various industrial revenue bonds had combined outstanding balances of $9.8$9.2 million as of September 30, 20182019 and $10.1$9.5 million as of December 31, 2017,2018, and have maturities through 2027.
Covenants
The Credit Agreement and the Indentures include customary representations, warranties, covenants acceleration, indemnity and events of default provisions. The covenants under the Credit Agreement include, among other things, two2 financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio. We were in compliance with all financial covenants in our Credit Agreement at September 30, 2019.
Note 7. 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 and storage. 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:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| (in millions) | ||||||||||
Operating lease cost | $ | 20.9 | | $ | 21.2 | | $ | 62.8 | | $ | 61.6 |
9
Supplemental cash flow and balance sheet information is presented below:
| | |
| September 30, | |
| 2019 | |
| (in millions) | |
Supplemental cash flow information: | | |
Cash payments for operating leases (nine months ended) | $ | 62.6 |
Right-of-use assets obtained in exchange for lease obligations (nine months ended) | $ | 53.2 |
| | |
Other lease information: | | |
Weighted average remaining lease term—operating leases | | 5.8 years |
Weighted average discount rate—operating leases | | 4.4% |
Maturities of operating lease liabilities as of September 30, 2019 are as follows:
| | |
| (in millions) | |
2019 (remaining three months) | $ | 15.8 |
2020 | | 56.0 |
2021 | | 44.4 |
2022 | | 32.5 |
2023 | | 24.6 |
Thereafter | | 58.0 |
Total operating lease payments | | 231.3 |
Less: imputed interest | | (31.4) |
Total operating lease liabilities | $ | 199.9 |
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:
| | |
| (in millions) | |
2019 | $ | 59.5 |
2020 | | 45.5 |
2021 | | 32.9 |
2022 | | 22.7 |
2023 | | 16.2 |
Thereafter | | 40.7 |
Total operating lease payments | $ | 217.5 |
Note 8. Income Taxes
Our effective income tax ratesrate for the three-month periodsthree months and nine months ended September 30, 2018 and 2017 were2019 was 25.0% compared to 22.9% and 30.4%, respectively. Our effective income tax rates23.7% for the nine-month periods ended September 30, 2018three months and 2017 were 23.7% and 31.5%, respectively. Our 2018 three-month and nine-month period effective income tax rates were favorably impacted by the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), which included significant changes to the taxation of U.S. corporations, including a reduction of the U.S. federal statutory rate from 35% to 21%, effective January 1, 2018. Based on our preliminary assessment of the impact of Tax Reform, we recognized a one-time, provisional net tax benefit of $207.3 million in the fourth quarter of 2017, primarily related to the remeasurement of deferred tax assets and liabilities at the lowered federal statutory tax rate, which was partially offset by repatriation and related liabilities. Given the substantial changes to the Internal Revenue Code as a result of Tax Reform, our estimates of the financial impacts attributable to Tax Reform are subject to continuing analysis, interpretation and clarification of the new law, which could result in changes to our estimates in the fourth quarter of 2018. The adjustments to our provisional estimates during the nine months ended September 30, 2018, respectively. The differences between our effective income tax rates and the U.S. federal statutory rate of 21% were not significant. Statemainly due to state income taxes partially offset by the effects of company-owned life insurance policies mainly accounted for the difference between our effective income tax rate and the federal statutory rate for the nine months ended September 30, 2018.policies.
Note 9. Equity
Common Stock and Share Repurchase PlanDividends
On October 20, 2015,22, 2019, our Board of Directors increaseddeclared the number2019 fourth quarter cash dividend of shares authorized$0.55 per share of common stock, payable on December 6, 2019 to be repurchased under ourstockholders of record as of November 15, 2019.
10
During the three months ended September 30, 2019 and 2018, we declared and paid quarterly dividends of $0.55 and $0.50 per share, repurchase plan by 7.5or $36.7 million shares and extended$35.9 million in total, respectively. During the durationnine months ended September 30, 2019 and 2018, we declared and paid quarterly dividends of $1.65 and $1.50 per share, or $110.6 million and $108.5 million in total, respectively. In addition, we paid $2.7 million and $2.0 million in dividend equivalents with respect to vested restricted stock units (“RSUs”) during the nine months ended September 30, 2019 and 2018, respectively.
Stock-Based Compensation
We make annual grants of long-term incentive awards to officers and key employees in the forms of service-based and performance-based RSUs that have approximately 3-year vesting periods. The performance-based RSU awards are subject to both service and performance goal criteria. We also make annual grants of stock to the non-employee members of the plan through December 31, 2018. Board of Directors that vest immediately upon grant. The fair value of the RSUs and stock grants is determined based on the closing stock price of our common stock on the grant date.
In the nine months ended September 30, 2019 and 2018, we made payments of $9.6 million and $5.5 million, respectively, to tax authorities on our employees’ behalf for shares withheld related to net share settlements. These payments are reflected in the Stock-based compensation, net caption of our consolidated statements of equity.
A summary of the status of our unvested service-based and performance-based RSUs as of September 30, 2019 and changes during the nine-month period then ended is as follows:
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Grant Date | |
| | | | Fair Value | |
Unvested RSUs | | Shares | | Per RSU | |
Unvested at January 1, 2019 | | 889,830 | | $ | 82.05 |
Granted(1) | | 488,345 | | | 88.05 |
Vested | | (3,837) | | | 82.05 |
Cancelled or forfeited | | (10,318) | | | 82.99 |
Unvested at September 30, 2019 | | 1,364,020 | | $ | 84.19 |
Shares reserved for future grants (all plans) | | 1,037,999 | | | |
(1) | Comprised of 294,190 service-based RSUs and 194,155 performance-based RSUs granted in March 2019 with a fair value of $88.05 per RSU. The service-based RSUs cliff vest on December 1, 2021 and the performance-based RSUs are subject to a three-year performance period ending December 31, 2021. |
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 October 23, 2018,September 30, 2019, we had authorization under the plan to repurchase approximately 10.76.4 million shares, or about 15%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 Exchange Act of 1934, as amended (the “Exchange Act”). During the nine months ended
10
September 30, 2018, we repurchased 1,510,916 shares of our common stock at an average cost of $86.48 per share for a total of $130.7 million. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.
Common stock and additional paid-in capital activity included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||
| September 30, 2018 |
| September 30, 2018 | ||||||||||||
|
|
| Weighted Average |
|
|
| Weighted Average | ||||||||
| Shares |
| Amount |
| Exercise Price Per Share |
| Shares |
| Amount |
| Exercise Price Per Share | ||||
| (in millions, except share and per share amounts) | ||||||||||||||
Stock-based compensation(1) | 3,984 |
| $ | 14.4 |
|
|
|
| 288,991 |
| $ | 28.3 |
|
|
|
Stock options exercised | — |
|
| — |
|
|
|
| 48,275 |
|
| 2.8 |
| $ | 57.91 |
Share repurchases(2) | (918,352) |
|
| (80.7) |
|
|
|
| (1,510,916) |
|
| (130.7) |
|
|
|
Total | (914,368) |
| $ | (66.3) |
|
|
|
| (1,173,650) |
| $ | (99.6) |
|
|
|
|
|
|
|
Dividends
On October 23, 2018, our Board of Directors declared the 2018 fourth quarter cash dividend of $0.50 per share. The dividend is payable on December 7, 2018 to stockholders of record as of November 16, 2018.
During the third quarters of 2018 and 2017, we declared and paid quarterly dividends of $0.50 and $0.45 pershares. Our share or $35.9repurchases were $50.0 million and $32.8 million in total, respectively. During the nine months ended September 30, 20182019 and 2017, we declared and paid quarterly dividends of $1.50 and $1.35 per share, or $108.5$130.7 million, and $98.4including $0.6 million pending settlement, in total, respectively. During the nine months ended September 30, 2018 and 2017, we paid $2.0 million and $0.9 million in dividend equivalents with respect to vested restricted stock units (“RSUs”), respectively.2018.
Stock-Based Compensation
We make annual grants of long-term incentive awards to officers and key employees in the forms of service-based and performance-based RSUs that generally have approximately 3-year vesting periods. The performance-based RSU awards are subject to both service and performance goal criteria. We also make annual grants of stock to the non-employee members of the Board of Directors that include dividend rights and vest immediately upon grant. The fair value of the RSUs and stock grants is determined based on the closing stock price of our common stock on the grant date.
11
A summary of the status of our unvested service-based and performance-based RSUs as of September 30, 2018 and changes during the nine-month period then ended is as follows:
|
|
|
|
|
|
|
|
|
| Weighted | |
|
|
|
| Average Grant | |
Unvested Shares |
| Shares |
| Date Fair Value | |
Unvested at January 1, 2018 |
| 924,575 |
| $ | 74.09 |
Granted(1) |
| 474,715 |
|
| 84.26 |
Vested |
| (7,790) |
|
| 72.43 |
Cancelled or forfeited |
| (20,160) |
|
| 75.36 |
Unvested at September 30, 2018 |
| 1,371,340 |
| $ | 77.60 |
Shares reserved for future grants (all plans) |
| 1,376,110 |
|
|
|
|
|
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss included the following:
|
|
|
|
|
|
|
|
|
|
|
| Pension and |
| Accumulated | |||
| Foreign Currency |
| Postretirement |
| Other | |||
| Translation |
| Benefit Adjustments, |
| Comprehensive | |||
| Loss |
| Net of Tax |
| Loss | |||
| (in millions) | |||||||
Balance as of January 1, 2018 | $ | (51.1) |
| $ | (20.5) |
| $ | (71.6) |
Current-period change |
| (11.5) |
|
| — |
|
| (11.5) |
Balance as of September 30, 2018 | $ | (62.6) |
| $ | (20.5) |
| $ | (83.1) |
| | | | | | | | |
| | | | Pension and | | Accumulated | ||
| Foreign Currency | | Postretirement | | Other | |||
| Translation | | Benefit Adjustments, | | Comprehensive | |||
| Loss |
| Net of Tax |
| Loss | |||
| (in millions) | |||||||
Balance as of January 1, 2019 | $ | (76.8) | | $ | (25.9) | | $ | (102.7) |
Current-period change | | (0.7) | | | — | | | (0.7) |
Balance as of September 30, 2019 | $ | (77.5) | | $ | (25.9) | | $ | (103.4) |
Foreign currency translation adjustments have not been adjusted for income taxes. Pension and postretirement benefit adjustments are net of taxes of $13.6$6.5 million as of September 30, 20182019 and December 31, 2017.2018. Income tax effects are released from accumulated other comprehensive loss as defined benefit plan and supplemental executive retirement plan obligations are settled.
Note 10. Commitments and Contingencies
Environmental Contingencies
We are currently involved with an 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 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.
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 effectimpact on our consolidated financial position, results of operations financial condition or cash flows. We maintain general liability insurance against risks arising out of our normalin the ordinary course of business.
12
Note 11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
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|
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|
|
|
|
| |||||||||||
| Three Months Ended |
| Nine Months Ended | |||||||||||||||||||
| September 30, |
| September 30, | |||||||||||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||
| (in millions, except share and per share amounts) | |||||||||||||||||||||
| | | | | | | | | | | | |||||||||||
| Three Months Ended | | Nine Months Ended | |||||||||||||||||||
| September 30, | | September 30, | |||||||||||||||||||
| 2019 |
| 2018 | | 2019 | | 2018 | |||||||||||||||
| (in millions, except number of shares which are reflected in thousands and per share amounts) | |||||||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
| | |
| | |
| | |
| | |
Net income attributable to Reliance | $ | 148.3 |
| $ | 97.3 |
| $ | 548.1 |
| $ | 312.0 | $ | 162.7 |
| $ | 148.3 |
| $ | 535.9 |
| $ | 548.1 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
| | |
| | |
| | |
| | |
Weighted average shares outstanding |
| 71,940,253 |
|
| 72,908,979 |
|
| 72,364,121 |
|
| 72,881,000 | | 66,656 |
| | 71,940 |
| | 66,941 |
| | 72,364 |
Dilutive effect of stock-based awards |
| 1,040,977 |
|
| 708,500 |
|
| 772,461 |
|
| 630,427 | | 1,048 |
| | 1,041 |
| | 927 |
| | 773 |
Weighted average diluted shares outstanding |
| 72,981,230 |
|
| 73,617,479 |
|
| 73,136,582 |
|
| 73,511,427 | | 67,704 |
| | 72,981 |
| | 67,868 |
| | 73,137 |
|
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|
|
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|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
Earnings per share attributable to Reliance stockholders: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Diluted | $ | 2.03 |
| $ | 1.32 |
| $ | 7.49 |
| $ | 4.24 | $ | 2.40 | | $ | 2.03 | | $ | 7.90 | | $ | 7.49 |
Basic | $ | 2.06 |
| $ | 1.33 |
| $ | 7.57 |
| $ | 4.28 | $ | 2.44 | | $ | 2.06 | | $ | 8.01 | | $ | 7.57 |
Potentially dilutive securities whose effect would have been antidilutive were not significant for the three-month and nine-monthall periods ended September 30, 2018 and 2017.presented.
Note 12. Impairment and Restructuring Charges
We recordedThe impairment and restructuring charges consisted of the following:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| (in millions) | ||||||||||
Property, plant and equipment | $ | — | | $ | 2.3 | | $ | 1.2 | | $ | 2.3 |
Intangible assets, net | | — | | | 33.2 | | | — | | | 33.2 |
Total impairment charges | | — | | | 35.5 | | | 1.2 | | | 35.5 |
Restructuring––warehouse, delivery, selling, general and administrative expense | | — | | | 1.3 | | | — | | | 1.3 |
Total impairment and restructuring charges | $ | — | | $ | 36.8 | | $ | 1.2 | | $ | 36.8 |
The $36.8 million of impairment and restructuring charges in the three-monththree months and nine-month periodsnine months ended September 30, 2018 compared to $2.1 million and $2.4 million in the three-month and nine-month periods ended September 30, 2017, respectively. The 2018 charges mainly related to our decision to downsize one of our energy businesses due to changes in competitive factors for certain of the products they sell. The measurement of these assets at fair value was determined using a combination of discounted cash flow techniques for intangible assets and the market approach for property, plant, and equipment.
The impairment and restructuring charges (credits) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
| (in millions) | ||||||||||
Property, plant and equipment | $ | 2.3 |
| $ | 2.8 |
| $ | 2.3 |
| $ | 2.8 |
Intangible assets, net |
| 33.2 |
|
| — |
|
| 33.2 |
|
| — |
Total impairment charges |
| 35.5 |
|
| 2.8 |
|
| 35.5 |
|
| 2.8 |
Restructuring––cost of sales |
| — |
|
| — |
|
| — |
|
| (0.2) |
Restructuring––warehouse, delivery, selling, general and administrative expense |
| 1.3 |
|
| (0.7) |
|
| 1.3 |
|
| (0.2) |
Total impairment and restructuring charges | $ | 36.8 |
| $ | 2.1 |
| $ | 36.8 |
| $ | 2.4 |
13. Subsequent Event
On October 23, 2018, we purchased the remaining 40% noncontrolling interest of Acero Prime, S. de R.L. de C.V., a toll processor in Mexico, which increased our ownership from 60% to 100%.
13
RELIANCE STEEL & ALUMINUM CO.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements may include, but are not limited to, discussions of our industry, our end markets, our business strategies and our expectations concerning future demand and our results of operations, margins, profitability, impairment charges, taxes, liquidity, litigation matters and capital resources. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”“potential,” “preliminary,” “range” and “continue,” the negative of these terms, and similar expressions. All statements contained in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date of such statements.
Forward-looking statements involve known and unknown risks and uncertainties and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements as a result of various important factors, including, but not limited to, those disclosed in this report and in other reports we have filed with the Securities and Exchange Commission (the “SEC”). Important risks and uncertainties about our business can be found in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. As a result, these statements speak only as of the date that they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Important risksYou should review any additional disclosures we make in our press releases and uncertainties about our business can be found in Item 1A “Risk Factors” of our Annual Report on FormForms 10-K, for the year ended December 31, 201710-Q and 8-K filed with or furnished to the SEC, and such risk factors may be updated from timeSEC. We also suggest that you listen to time, including in Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.our quarterly earnings release conference calls with financial analysts.
Overview
We hadWith relatively steady demand, strong operational execution in the three-monththird quarter of 2019 resulted in solid financial results.
Certain key financial results for the three months and nine-month periodsnine months ended September 30, 2018, resulting in our2019 are:
● | Net sales of $2.69 billion in the third quarter of 2019, down $288.6 million, or 9.7%, from the second highest
14 Our same-store tons sold decreased
Our S,G&A expense declined $12.3 million, or 2.3%, and $4.1 million, or 0.3%, in the three months and nine months ended September 30, 2019, respectively, compared to the same periods in
We believe that our broad end market exposure, We will continue to focus on working capital management and maximizing profitability of our existing businesses, as well as executing our proven growth strategies and stockholder return activities. As of September 30, 2019, we had $1.05 billion available for borrowing on our revolving credit facility and $166.0 million in cash and cash equivalents. We believe our sources of liquidity will continue to be adequate to maintain operations, finance strategic initiatives, pay dividends, and execute purchases under our share repurchase program. Acquisitions 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 diverse-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 were $22.6 million for the nine months ended September 30, 2019. 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, Mexico, 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 were On August 1, 2018, we acquired KMS 15 precision sheet metal fabrication ranging from prototypes to large production runs 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
We funded our 2018
The following table sets forth certain income statement data for the three-month and nine-month periods ended September 30,
16 Net Sales
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). Same-store amounts exclude the results of our Our Demand in non-residential construction (including infrastructure), our largest end market served, increased in
Since we primarily purchase and sell our inventories in the “spot” market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. The mix of products sold can also have an impact on our average selling prices.
17 imposed in March 2018. As carbon steel sales represent approximately Our major commodity selling prices changed year-over-year as follows:
Cost of Sales
The Also, our last-in, first-out (“LIFO”) method inventory valuation reserve adjustment, which is included in cost of sales and, in effect, reflects cost of sales at current replacement costs, resulted in Gross Profit
Our gross profit decreased in the
18 Our gross profit margin
Expenses
Same-store amounts exclude the results of our acquisitions (other than our purchase of the remaining 40% ownership of Acero Prime) completed in 2018. Our same-store S,G&A expenses were lower in the three months and nine months ended September 30, 2019 compared to the same periods in 2018 due to decreases in incentive compensation for our managers and salespeople at our metals service centers, which is based on profitability that excludes the impact of our LIFO inventory valuation reserve adjustments, that offset the impact of general inflation, including wage increases. Our S,G&A expense as a percentage of sales increased in the three months and nine months ended September 30, 2019 compared to the same periods in 2018, mainly due to our lower sales levels. We recorded a $35.5 million impairment of long-lived assets charge and a $1.3 million restructuring charge in the three-month and nine-month periods ended September 30, 2018,
19 Operating Income
Our operating income was
Income Tax Rate Our effective income tax rate for the three months and nine months ended September 30, 2019 was 25.0% compared to 22.9% and 23.7% for the three months and nine months ended September 30, 2018, respectively. The differences between our effective income tax rates and the U.S. federal statutory rate of 21% were 20 Net Income
The Liquidity and Capital Resources Operating Activities Net cash Investing Activities Net cash used in investing activities of
Financing Activities
Net cash used in
On October
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. Liquidity Our primary sources of liquidity are funds generated from operations and our $1.5 billion revolving credit facility. Our total outstanding debt at September 30,
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 up to an additional $500.0 million at our request, subject to approval of the lenders and certain other customary conditions. We intend to use the revolving credit facility for working capital and general corporate purposes, including, but not limited to, capital expenditures, dividend payments, repayment of debt, share repurchases, internal growth initiatives and acquisitions. The $600.0 million term loan due September 30, 2021 amortizes in quarterly installments, with an annual amortization of 10% until June 2021, with the balance to be paid at maturity. All borrowings under the Credit Agreement may be prepaid without penalty.
Revolving credit facilities with a combined credit limit of
Capital Resources On November 20, 2006, we entered into an indenture (the “2006 Indenture”) 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. If we experience a change in control accompanied by a downgrade in our credit rating, we will be required to make an offer to repurchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest. Various industrial revenue bonds had combined outstanding balances of As of September 30, 22 future operating needs and to repay our debt obligations as they become due. In addition to funds generated from operations and funds available under our revolving credit facility, we expect to be able to access the capital markets to raise funds, if desired. We believe our investment grade credit rating enhances our ability to effectively raise capital, if needed. We expect to continue our acquisition and other growth Covenants The Credit Agreement and the Indentures include customary representations, warranties, covenants, acceleration, indemnity and events of default provisions. The covenants under the Credit Agreement include, among other things, two financial maintenance covenants that require us to comply with a minimum interest coverage ratio and a maximum leverage ratio. Our interest coverage ratio for the twelve-month period ended September 30, We were in compliance with all financial covenants in our Credit Agreement at September 30,
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, Contractual Obligations and Other Commitments We had no material changes in commitments for capital expenditures 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. 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. Reduced shipping days also have a significant impact on our profitability. We cannot predict whether period-to-period fluctuations will be consistent with historical patterns. Results of any one or more quarters are therefore not necessarily indicative of annual results. 23 Goodwill and Other Intangible Assets Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical accounting estimates include those related to goodwill, other intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. See “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, New Accounting Guidance See Note 2—“Impact of Recently Issued Accounting Guidance” Item 3. Quantitative And Qualitative Disclosures About Market Risk In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates and metals pricing, demand and availability. Item 4. Controls And Procedures Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to and as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered in this report, the Company’s disclosure controls and procedures are effective to ensure information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 24 There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, PART II — OTHER INFORMATION The information contained under the heading “Legal Matters” in Note
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 September 30, 2019, we had authorization under the plan to repurchase approximately 6.4 million shares, or about 10% of our current outstanding shares. We did not repurchase any shares of our common stock
Item 3. Defaults Upon Senior Securities None.
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