1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.
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(Exact name of registrant as specified in its charter)
California 95-1142616
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 East 25th Street
Los Angeles, California 90058
(213) 582-2272
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(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1998, 18,449,802 shares of the registrant's common
stock, no par value, were outstanding.
2
INDEX
PART I -- FINANCIAL INFORMATION ............................................................ 1
Consolidated Balance Sheets ........................................................ 1
Consolidated Statements of Income (Unaudited) ...................................... 2
Consolidated Statements of Cash Flows (Unaudited) .................................. 4
Notes to Consolidated Financial Statements (Unaudited) ............................. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................................. 9
PART II -- OTHER INFORMATION .............................................................. 13
SIGNATURES ................................................................................ 14
3
PART I -- FINANCIAL INFORMATION
RELIANCE STEEL & ALUMINUM CO.
Consolidated Balance Sheets
(In thousands except share amounts)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
(unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 4,601 $ 34,047
Accounts receivable, less allowance for doubtful accounts
of $6,364 at September 1998 and $4,343 at December 1997 165,337 117,733
Inventories 241,281 158,736
Prepaid expenses and other current assets 2,815 2,472
Deferred income taxes 9,025 9,086
------------- -------------
Total current assets 423,059 322,074
Property, plant and equipment, at cost:
Land 31,346 26,348
Buildings 126,127 95,424
Machinery and equipment 135,146 104,064
Allowances for depreciation (77,035) (64,872)
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215,584 160,964
Investment in 50%-owned company 31,979 28,760
Goodwill 156,595 67,258
Other assets 5,579 4,810
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Total assets $ 832,796 $ 583,866
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 124,117 $ 91,916
Wages and related accruals 7,978 7,658
Deferred income taxes 9,148 9,148
Current maturities of long term debt 100 100
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Total current liabilities 141,343 108,822
Long term debt 325,250 143,350
Deferred income taxes 18,531 18,530
Shareholders' equity:
Preferred stock no par value:
Authorized shares - 5,000,000
None issued or outstanding -- --
Common stock, no par value:
Authorized shares - 100,000,000 at September 30, 1998 and
20,000,000 at December 31, 1997
Issued and outstanding shares - 18,869,352 at September 30,
1998 and 18,831,458 at December 31, 1997, stated capital 155,347 154,761
Retained earnings 192,325 158,403
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Total shareholders' equity 347,672 313,164
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Total liabilities and shareholders' equity $ 832,796 $ 583,866
============= =============
See Notes to Consolidated Financial Statements.
NOTE: The Balance Sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1.
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RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
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Net sales $ 357,819 $ 254,236
Other income 747 671
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358,566 254,907
Costs and expenses:
Cost of sales 271,486 197,718
Warehouse, delivery, selling, administrative
and general 57,754 37,386
Depreciation and amortization 5,497 3,330
Interest 5,017 3,009
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339,754 241,443
Income before equity in earnings of 50%-owned
company and income taxes 18,812 13,464
Equity in earnings of 50%-owned company 1,423 1,002
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Income before income taxes 20,235 14,466
Income taxes:
Federal 7,082 4,948
State 1,215 1,103
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8,297 6,051
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Net income $ 11,938 $ 8,415
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Earnings per share - Diluted $ .63 $ .55
============= =============
Weighted average shares outstanding - Diluted 19,027,000 15,346,000
============= =============
Earnings per share - Basic $ .63 $ .56
============= =============
Weighted average shares outstanding - Basic 18,869,000 15,164,000
============= =============
Cash dividends declared $ .06 $ .04
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2.
5
RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Income (Unaudited)
(In thousands except share and per share amounts)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
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Net sales $ 999,471 $ 699,651
Gain on sale of real estate -- 1,008
Other income 2,555 1,670
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1,002,026 702,329
Costs and expenses:
Cost of sales 761,598 541,094
Warehouse, delivery, selling, administrative
and general 157,304 107,907
Depreciation and amortization 14,195 9,277
Interest 11,684 7,807
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944,781 666,085
Income before equity in earnings of 50%-owned
company and income taxes 57,245 36,244
Equity in earnings of 50%-owned company 4,114 3,675
------------- -------------
Income before income taxes 61,359 39,919
Income taxes:
Federal 21,476 13,093
State 3,682 3,114
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25,158 16,207
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Net income $ 36,201 $ 23,712
============= =============
Earnings per share - Diluted $ 1.90 $ 1.56
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Weighted average shares outstanding - Diluted 19,031,000 15,403,000
============= =============
Earnings per share - Basic $ 1.92 $ 1.56
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Weighted average shares outstanding - Basic 18,859,000 15,220,000
============= =============
Cash dividends declared $ .18 $ .13
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3.
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RELIANCE STEEL & ALUMINUM CO.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 36,201 $ 23,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,195 9,277
Deferred income taxes 64 (110)
Gain on sales of machinery and equipment (223) (362)
Gain on sale of real estate -- (1,008)
Equity in earnings of 50%-owned company (3,719) (3,345)
Changes in operating assets and liabilities:
Accounts receivable (3,467) (32,045)
Inventories (15,965) 345
Prepaid expenses and other assets 679 2,267
Accounts payable and accrued expenses (17,935) 11,148
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Net cash provided by operating activities 9,830 9,879
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INVESTMENT ACTIVITIES
Purchases of property, plant and equipment (17,258) (19,159)
Proceeds from sales of property and equipment 460 1,816
Acquisitions of metals service centers, net of cash acquired (137,436) (44,466)
Dividends received from 50% owned company 500 3,500
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Net cash used in investing activities (153,734) (58,309)
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FINANCING ACTIVITIES
Proceeds from borrowings 193,000 225,000
Principal payments on long-term debt and short-term
borrowings (75,733) (165,510)
Dividends paid (3,395) (1,948)
Issuance of common stock 586 1,037
Repurchase of common stock -- (7,435)
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Net cash provided by financing activities 114,458 51,144
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(Decrease) increase in cash (29,446) 2,714
Cash and cash equivalents at beginning of period 34,047 815
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Cash and cash equivalents at end of period $ 4,601 $ 3,529
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the period $ 7,243 $ 7,407
Income taxes paid during the period $ 23,168 $ 15,564
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RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for fair presentation, with
respect to the interim financial statements have been included. The results of
operations for the three month and nine month periods ended September 30, 1998
are not necessarily indicative of the results for the full year ending December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1997, included
in the Reliance Steel & Aluminum Co.
Form 10-K.
In April 1998, the Company effected a short-form merger whereby Amalco Metals,
Inc. ("Amalco"), a wholly-owned subsidiary of the Company, was merged into the
Company. At that time, Amalco was combined with the existing Reliance
Metalcenter in Santa Clara in its new facility in Union City, California.
Additionally, effective July 1, 1998, MetalCenter, Inc. ("MetalCenter"), a
wholly-owned subsidiary of the Company, was merged into the Company through a
short-form merger. MetalCenter will operate as a Reliance division.
2. ACQUISITIONS
On September 18, 1998, the Company acquired 100% of the stock of Lusk Metals, a
privately-held metals service center with headquarters in Hayward, California
(near San Francisco), for approximately $22,000,000 in cash. The purchase of
Lusk Metals was funded with borrowings under the Company's line of credit. Lusk
Metals had net sales of approximately $30,000,000 for the twelve months ended
February 28, 1998, and processes and distributes primarily precision cut
aluminum plate and aluminum sheet and extrusions.
Effective July 1, 1998, the Company acquired 100% of the stock of Chatham Steel
Corp. ("Chatham"), a privately-held metals service center headquartered in
Savannah, Georgia for $68,000,000 in cash. Chatham has additional facilities in
Columbia, South Carolina; Durham, North Carolina; Orlando, Florida;
Jacksonville, Florida; and Birmingham, Alabama. The purchase of Chatham was
funded with borrowings under the Company's line of credit. Chatham's net sales
for the year ended December 31, 1997, were approximately $166,000,000.
On January 30, 1998, the Company acquired 100% of the outstanding capital stock
of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix
Metals"), for $21,000,000 in cash. Phoenix Metals is headquartered in Norcross
(Atlanta), Georgia, with additional metals service centers in Birmingham,
Alabama; Tampa, Florida; and Charlotte, North Carolina. The purchase of Phoenix
Metals was funded with proceeds from the 1997 equity offering and borrowings
under the Company's line of credit. Phoenix Metals' net sales for the twelve
months ended February 28, 1997, were approximately $112,000,000.
Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Company, L.L.C. and its subsidiary, Durrett-Sheppard
Steel of Pennsylvania, Inc., through its newly-formed subsidiary, Durrett
Sheppard Steel Co., Inc. ("DSS"), for $30,500,000 in cash. DSS is a metals
service center located in Baltimore, Maryland. This purchase was funded with
proceeds from the 1997 equity offering and borrowings under the Company's line
of credit. Durrett-Sheppard Steel Co., L.L.C. had net sales of approximately
$47,000,000 for the twelve months ended September 30,1997.
5.
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RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited) - (continued)
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 132, Employers Disclosures about Pensions and Other
Post-retirement Benefits, which is effective for financial statements for years
beginning after December 15, 1997, and which revises and standardizes disclosure
requirements for pensions and other post-retirement benefits. The Company will
revise its disclosures as necessary upon adoption of Statement 132.
Additionally, in March 1998, Statement of Position (SOP) 98-1 was issued, which
is effective for fiscal years beginning after December 15, 1998. SOP 98-1
requires capitalization and amortization of qualified computer software costs
over their estimated useful life. There will be no impact on the Company's
earnings or financial position due to the adoption of SOP 98-1. In June 1998,
the FASB issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. Because of the Company's minimal use of derivatives there will be
no impact on the Company's earnings or financial position due to the adoption of
Statement 133.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
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Revolving lines of credit ($225,000 limit),
interest at variable rates ................... $ 182,000 $ --
Senior unsecured notes due January 2, 2002 to
January 2, 2009, average interest rate
7.12% ........................................ 140,000 140,000
Variable Rate Demand Industrial Development
Revenue Bonds, Series 1989 A, due July 1,
2014, with interest payable quarterly ........ 3,350 3,450
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325,350 143,450
Less amounts due within one year ............... (100) (100)
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$ 325,250 $ 143,350
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In October 1997, the Company entered into a five year syndicated credit
agreement with five banks. This syndicated credit facility replaced the
Company's existing revolving line of credit, increasing the Company's borrowing
limit to $200,000,000. In October 1997, the Company also entered into a credit
agreement that allows the Company to issue and have outstanding up to
$10,000,000 of letters of credit. In September 1998, this credit agreement was
amended to add a facility for cash advances in the amount of $25,000,000 which
expires December 15, 1998. This amendment was executed to allow temporary
funding for acquisitions until such time as the planned private placement
funding was completed. The Company issued $150,000,000 of senior unsecured notes
in a private placement of debt. The notes mature at various dates over a period
of seven to twelve years, with an average life of 10.3 years, beginning October
15, 2005, to October 15, 2010, at an average interest rate of 6.55%. The
proceeds were funded on November 3, 1998, and were used to pay off bank debt in
connection with recent acquisitions.
6.
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RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited) - (continued)
5. SHAREHOLDERS' EQUITY
In August 1998, the Board of Directors approved the purchase of up to an
additional 2,500,000 shares of the Company's outstanding Common Stock through
its Stock Repurchase Plan, for a total of up to 4,000,000 shares. The Stock
Repurchase Plan was initially established in December 1994 and authorizes the
Company to purchase shares of its Common Stock from time to time in the open
market or in privately-negotiated transactions. Repurchased shares are redeemed
and treated as authorized but unissued shares. As of September 30, 1998, the
Company had repurchased a total of 1,350,750 shares of its Common Stock under
the Stock Repurchase Plan, at an average cost of $11.37 per share. No shares
were repurchased by the Company during the nine month period ended September 30,
1998. During October 1998, the Company repurchased 430,800 shares of its common
stock at an average price of $25.79 per share.
In May 1998, the Company amended its Articles of Incorporation to increase the
number of authorized shares from 20,000,000 to 100,000,000. Additionally in May
1998, the shareholders approved the adoption of a Directors Stock Option Plan
for non-employee directors. 200,000 shares have been reserved for issuance under
the Directors Stock Option Plan. Options to acquire 5,000 shares, with an
exercise price at fair market value at the date of grant, were granted to each
non-employee member effective with the approval of the plan.
In March 1998, 5,685 shares of Common Stock were issued to division managers and
officers of the Company under the 1997 Key-Man Incentive Plan.
In November 1997, the Company issued 3,595,000 new shares of its Common Stock at
an offering price of $27.625 per share in a secondary public offering. The
proceeds of $93,908,000 (net of underwriter commissions and offering costs) were
used to pay down bank debt, to fund the acquisition of Georgia Steel, and to
fund a portion of the acquisitions of DSS and Phoenix Metals.
6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
All weighted shares and per share amounts have been adjusted for the 3-for-2
common stock split that occurred in June 1997.
7. EMPLOYEE BENEFITS
Effective April 1, 1998, substantially all 401(k) and profit sharing plans of
the Company and its subsidiaries were combined into one master plan. This master
plan will continue to allow each subsidiary's Board of Directors to determine
independently the annual matching percentage and maximum compensation limit or
annual profit sharing contribution. Eligibility will continue in accordance with
each subsidiary's previous plan, and vesting is based on prior service.
Eligibility occurs after three months of service, and the Company contribution
vests at 25% per year, commencing one year after the employee enters the plan.
7.
10
RELIANCE STEEL & ALUMINUM CO.
Notes to Consolidated Financial Statements (Unaudited) - (continued)
8. SUBSEQUENT EVENTS
On October 5, 1998, the Company acquired Engbar Pipe & Steel Company ("Engbar"),
a privately-held metals service center company headquartered in Denver,
Colorado. Engbar will operate as a wholly-owned subsidiary of the Company. The
purchase of Engbar was funded with borrowings under the Company's line of
credit. Net sales of Engbar for the twelve months ended December 31, 1997, were
approximately $14,000,000.
On October 1, 1998, the Company acquired Steel Bar Corporation ("Steel Bar"), a
privately-held metals service center in Greensboro, North Carolina. Steel Bar
will operate as a wholly-owned subsidiary of Phoenix Metals, which is a
wholly-owned subsidiary of the Company. The purchase of Steel Bar was funded
with borrowings under the Company's line of credit. Steel Bar's net sales for
the twelve months ended December 31, 1997, were approximately $13,000,000.
Also on October 1, 1998, the Company acquired American Metals Corporation
("American Metals"), based in West Sacramento, California, with additional
service centers in Redding and Fresno, California. American Metals was
previously owned by American Steel, L.L.C., ("American Steel" ) in which the
Company owns a 50%-interest but has operational control. American Metals was
originally organized as a corporate joint venture in 1993 between the Company
and American Industries, Inc. ("Industries"). The Company and Industries each
contributed their ownership of American Metals, along with other assets, to form
American Steel in 1995, which was comprised of the three American Metals service
centers and additional American Steel service centers in Portland, Oregon and
Kent, Washington. The transaction for the Company to acquire 100% of American
Metals was accomplished in two steps. First, American Steel distributed the
stock of American Metals equally to the Company and Industries. Immediately
thereafter, American Metals redeemed its stock owned by Industries for cash and
title to American Metals' real property, which is being leased back from
Industries. American Metals' will operate as a wholly-owned subsidiary of the
Company. The Company will continue to account for its investment in American
Steel using the equity method of accounting. American Metals' net sales for the
twelve month period ended December 31, 1997, were approximately $56,000,000.
8.
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RELIANCE STEEL & ALUMINUM CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain income statement data for the three month
and nine month periods ended September 30, 1998 and September 30, 1997 (dollars
are shown in thousands and certain amounts may not calculate due to rounding):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
--------------------------------------------- ---------------------------------------------
% OF % OF % OF % OF
NET NET $ NET NET
$ SALES $ SALES $ SALES $ SALES
-------- -------- -------- -------- -------- -------- -------- --------
NET SALES .................... $357,819 100.0% $254,236 100.0% $999,471 100.0% $699,651 100.0%
GROSS PROFIT ................. 86,333 24.1 56,518 22.2 237,873 23.8 158,557 22.7
OPERATING EXPENSES ........... 63,251 17.7 40,717 16.0 171,499 17.2 117,183 16.7
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM OPERATIONS ....... $ 23,082 6.5% $ 15,801 6.2% $ 66,374 6.6% $ 41,373 5.9%
======== ======== ======== ======== ======== ======== ======== ========
FIFO INCOME FROM OPERATIONS... $ 20,457 5.7% $ 16,412 6.5% $ 64,624 6.5% $ 44,223 6.3%
======== ======== ======== ======== ======== ======== ======== ========
Substantially all inventories of the Company have been stated on the last-in,
first-out ("LIFO") method. The Company uses the LIFO method of inventory
valuation for these inventories because it results in a better matching of costs
and revenues. Under the LIFO method, the effect of suppliers' price increases or
decreases is reflected directly in the cost of goods sold. During periods of
increasing prices, LIFO accounting will cause reported income to be lower than
would otherwise result from the use of the first-in, first-out ("FIFO") method
of inventory valuation. The table above includes income from operations and the
discussions that follow also include analyses as if the Company used the FIFO
method. This information is for supplementary purposes only in order to
facilitate a comparison of the Company's results of operations with those of
other similar companies who use the FIFO method.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $103,583, or 40.7%, for the three months ended
September 30, 1998, compared to the same period of 1997, which reflects an
increase of 60.5% in tons sold and a decrease in the average sales price per ton
of 12.1%. The increase in tons sold during the 1998 period was primarily due to
the inclusion of the sales of AMI Metals, Inc. ("AMI"), acquired April 2, 1997;
Amalco Metals, Inc. ("Amalco"), acquired April 30, 1997; Service Steel Aerospace
Corp. ("SSA"), acquired October 1, 1997; Georgia Steel Supply Company ("Georgia
Steel"), acquired December 1, 1997; Phoenix Corporation ("Phoenix Metals"),
acquired January 30, 1998; Durrett Sheppard Steel Co., Inc. ("DSS"), acquired
January 30, 1998; Chatham Steel Corporation ("Chatham"), acquired July 1, 1998;
and Lusk Metals ("Lusk"), acquired September 18, 1998 (collectively, the
"Acquisitions"). The average selling prices decreased for the 1998 period due
mainly to a reduction in the costs of most of the Company's products and to the
change in product mix from the 1997 period resulting from the inclusion in 1998
of the net sales of DSS, Chatham and Georgia Steel. These operations primarily
sell carbon steel products, which generally have lower prices than certain other
products sold by the Company, such as aluminum and stainless steel products.
Excluding the Acquisitions, the tons sold by the Company remained consistent.
However, on a same-store basis, the average selling price per ton decreased by
5.6% during the 1998 period, which is primarily due to a decline in the selling
prices of most of the Company's products, which resulted from lower costs of
these products, including prices for electropolished stainless steel tubing and
fittings, where the average sales price per ton has dropped approximately 20.3%
due to the slowdown in the semiconductor manufacturing industry.
9.
12
Total gross profit increased $29,815, or 52.8%, in the three months ended
September 30, 1998, compared to the three months ended September 30, 1997.
Expressed as a percentage of sales, gross profit increased from 22.2% in 1997 to
24.1% in 1998. The improvement was due in part to a decrease in LIFO costs of
$2,625 in the 1998 period, which resulted primarily from decreased costs of most
of the Company's products, as compared to increased LIFO costs of $611 during
the corresponding 1997 period. On a FIFO basis, gross profit increased to 23.4%
of sales for the three month period ended September 30, 1998, compared to 22.5%
for the three months ended September 30, 1997. This increase was primarily due
to higher margins attained by certain of the Acquisitions included in the 1998
period, primarily from DSS, SSA and Georgia Steel.
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $20,368, or 54.5%, in the three month period ended September 30, 1998
compared to the corresponding period of 1997 and amounted to 16.1% and 14.7% of
sales, respectively. The dollar increase in expenses reflects the increase in
sales volume for the 1998 period, which includes the sales and related expenses
of the Acquisitions. The increase in G&A expenses as a percentage of sales was
primarily due to increased G&A expenses as a percentage of sales for certain
companies acquired since the 1997 period.
Depreciation and amortization expense increased 65.1% during the three months
ended September 30, 1998, compared to the corresponding period of 1997. This
increase is primarily due to the inclusion of depreciation expense related to
the assets of the Acquisitions, along with the amortization of the related
goodwill.
Interest expense increased by 66.7% due to increased borrowings during the three
months ended September 30, 1998, as compared to the corresponding period of
1997. These borrowings were used primarily to fund the Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997 (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $299,820, or 42.9%, for the nine months ended
September 30, 1998, compared to the same period of 1997. This increase in sales
reflects an increase of 40.0% in tons sold and an increase in the average sales
price per ton of 2.0%. The increase in tons sold was primarily due to the
inclusion of the sales of the Acquisitions during the nine month period ended
September 30, 1998. The average selling prices increased for the 1998 period due
mainly to the change in product mix from the 1997 period; the product mix
shifted toward higher sales of heat-treated aluminum and stainless steel
products from carbon steel products because of the acquisitions of AMI and
Amalco. Heat-treated aluminum and stainless steel products generally have higher
selling prices than carbon steel products. Excluding the Acquisitions, the
Company reported an increase of 1.9% in tons sold, and a decrease in the average
selling price per ton of 2.6%. The increase in tons sold is primarily due to
general economic improvements and an increased market share in the Company's
market areas experienced during the beginning of the 1998 period. The decrease
in the average selling price per ton for the 1998 period compared to the 1997
period resulted primarily due to lower selling prices of electropolished
stainless steel tubing and fittings sold to the semiconductor manufacturing
industry.
Total gross profit increased $79,316, or 50.0%, in the nine months ended
September 30, 1998, compared to the nine months ended September 30, 1997.
Expressed as a percentage of sales, gross profit increased from 22.7% in 1997 to
23.8% in 1998. This increase was primarily due to the change in LIFO costs.
During the 1998 period, LIFO cost decreases of $1,750 were recorded, which
resulted primarily from decreased costs of most of the Company's products, as
compared to increased LIFO costs of $2,850 during the 1997 period. On a FIFO
basis, gross profit increased to 23.6% of sales for the nine month period ended
September 30, 1998, from 23.1% for the nine months ended September 30, 1997. The
slight improvement was primarily due to the shift in product mix to higher
margin products, resulting primarily from the inclusion of the sales of products
sold by AMI, Amalco, SSA and DSS during the 1998 period.
10.
13
Warehouse, delivery, selling and general and administrative ("G&A") expenses
increased $49,397, or 45.8%, in the nine month period ended September 30, 1998,
compared to the corresponding period of 1997 and amounted to 15.7% and 15.4% of
sales, respectively. The dollar increase in expenses reflects the increase in
sales volume for the 1998 period, which includes the sales and related expenses
of the Acquisitions.
Depreciation and amortization expense increased 53.0% during the nine months
ended September 30, 1998, compared to the corresponding period of 1997. This
increase is primarily due to the inclusion of depreciation expense and the
amortization of goodwill related to the Acquisitions.
Interest expense increased by 49.7% due to increased borrowings during the nine
months ended September 30, 1998, as compared to the corresponding period of
1997, to fund the Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE
AND PER SHARE AMOUNTS)
At September 30, 1998, working capital amounted to $281,716 compared to $213,252
at December 31, 1997. The slight increase was primarily due to the working
capital of companies acquired in 1998. The Company's capital requirements are
primarily for working capital, acquisitions, and capital expenditures for
continued improvements in plant capacities and material handling and processing
equipment.
The Company's primary sources of liquidity are from internally generated funds
from operations and the Company's revolving line of credit. On October 22, 1997,
the Company entered into a syndicated credit facility with five banks. The
Company's borrowing limit under the revolving line of credit established under
this agreement was increased to $200,000. In September 1998, the Company amended
its existing credit agreement to allow for short-term borrowing of up to
$25,000. The Company also received commitments during September 1998 for the
private placement of debt in the aggregate amount of $150,000 which was funded
on November 3, 1998. The proceeds from these notes were used to pay down the
revolving line of credit. The senior notes that were issued in the private
placements have maturity dates ranging from 2002 to 2010 and bear interest at
rates ranging from 6.23% to 7.37% per annum.
Cash provided by operations remained consistent for the nine month period ended
September 30, 1998, as compared to the corresponding 1997 period.
Net capital expenditures, excluding acquisitions, were $17,258 for the nine
months ended September 30, 1998. The Company had no material commitments for
capital expenditures as of September 30, 1998. The Company anticipates that
funds generated from operations and funds available under its line of credit
will be sufficient to meet its working capital needs for the foreseeable future,
and the expansion of its facilities at certain of its metals service centers
currently in progress.
In November 1997, the Company issued 3,595,000 new shares of its Common Stock in
a public equity offering, resulting in net proceeds of $93,908. The proceeds
from this offering were used to pay down outstanding bank debt, including the
debt incurred to fund acquisitions. At December 31, 1997, the balance of the
proceeds was invested in high quality short-term investments (classified as cash
equivalents), which, along with bank debt, was then used to fund the
acquisitions of DSS and Phoenix Metals on January 30, 1998. In May 1998, the
Company increased the number of authorized shares outstanding of its common
stock from 20,000,000 to 100,000,000 shares. This increase allows the Company to
fund future acquisitions with stock, if desired, and also allows the Company to
issue additional shares in the public market, if desired.
On August 31, 1998, the Board of Directors of the Company approved the purchase
of up to an additional 2,500,000 shares of the Company's outstanding common
stock through its Stock Repurchase Plan, for a total of 4,000,000 shares. During
October 1998, the Company repurchased 430,800 shares of its common stock at an
average price of $25.79 per share.
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SEASONALITY
The Company recognizes that some of its customers may be in seasonal businesses,
especially customers in the construction industry. As a result of the Company's
geographic, product and customer diversity, however, the Company's operations
have not shown any material seasonal trends, although the months of November and
December traditionally have been less profitable because of a reduced number of
working days for shipments of the Company's products and holiday closures for
some of its customers. There can be no assurance that period-to-period
fluctuations will not occur in the future. Results of any one or more quarters
are therefore not necessarily indicative of annual results.
IMPACT OF YEAR 2000
The Company does not anticipate that there will be a material impact on the
results of operations or cash flows of the Company related to the Year 2000
Issue. The Year 2000 Issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than the year
2000. Most of the Company's locations were converting to a new computer system
to obtain additional functionality. The software has since been certified Year
2000 compliant by the Company's software vendor. In addition to the vendor's
certification, the Company has an ongoing program to test its systems for such
compliance. This conversion began in 1994 and has been progressing on schedule.
The final conversions are scheduled to occur in November 1999. A training staff
was hired in 1996 and has been solely dedicated to this conversion project. At
the Company's locations that are not being converted to this system, assessments
of the existing systems have occurred. The Company, working with its respective
software vendors, has adopted plans to make the minor modifications required to
address the Year 2000 Issue at these locations. Management believes that the
major business systems of the Company are not vulnerable to third parties'
failure to remediate their own Year 2000 Issues, as the Company's interface with
third parties, including customers and vendors, does not involve heavily
automated computer dependent communications. The Company believes that, with the
conversions to new software and modifications to existing software, the Year
2000 Issue will not pose significant operational problems for its computer
system. In the event the remaining conversions and modifications are not made,
or are not completed timely, the Year 2000 Issue is not expected to have a
material impact on the operations of the Company, as the products sold by the
Company and the processing and delivery equipment used are not date dependent,
minimizing the impact of any Year 2000 Issues related to meeting customer
requirements.
As the Company has been incurring costs related to this project since 1994 and
no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations or cash flows related
to the Year 2000 Issue.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.01 Amendment No. Two to Credit Agreement dated October 22, 1997.
10.02 Amendment No. Three to Credit Agreement dated October 22, 1997.
(b) Registrant filed a Report on Form 8-K dated July 1, 1998, reporting the
acquisition of Chatham Steel Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIANCE STEEL & ALUMINUM CO.
Dated: November 13, 1998 By: /s/ David H. Hannah
------------------------
David H. Hannah
President
By: /s/ Steven S. Weis
------------------------
Steven S. Weis
Senior Vice President and
Chief Financial Officer
14.