Three Months Ended March 31,
                                        2009                            2008
                                                % of                            % of
                                  $           Net Sales           $           Net Sales
      Net sales              $ 1,558,535           100.0 %   $ 1,908,170           100.0 %
      Gross profit (1)           354,442            22.7         492,279            25.8
      S,G&A expenses             276,634            17.7         281,629            14.8
      Depreciation expense        22,812             1.5          18,156             1.0
      Amortization expense         7,035             0.5           3,209             0.2

      Operating income       $    47,961             3.1 %   $   189,285             9.9 %

(1) Gross profit is Net sales less Cost of sales.

2008 Acquisitions
Acquisition of HLN Metal Centre Pte. Ltd.
On September 17, 2008, through our newly-formed Singapore company Reliance Metalcenter Asia Pacific, Pte, Ltd. ("RMAP"), we acquired the assets, including the inventory, machinery, and equipment, of the Singapore operation of HLN Metal Centre Pte. Ltd. RMAP focuses primarily on supplying metal to the electronics, semiconductor, and solar energy markets. We entered this market primarily to support existing customers that moved to or expanded their operations in Asia. Net sales of RMAP during the three months ended March 31, 2009 were approximately $0.5 million.
Acquisition of PNA Group Holding Corporation On August 1, 2008, we acquired all of the outstanding capital stock of PNA Group Holding Corporation, a Delaware corporation ("PNA"), in accordance with the Stock Purchase Agreement dated June 16, 2008. We paid cash consideration of approximately $321 million, net of purchase price adjustments, repaid or refinanced debt of PNA or its subsidiaries in the amount of approximately $725 million, paid related tender offer and consent solicitation premium payments of approximately $55 million and incurred direct acquisition costs of approximately $3 million for a total transaction value of approximately $1.1 billion. We funded the acquisition with proceeds from our new $500 million senior unsecured term loan and borrowings under our existing $1.1 billion syndicated revolving credit facility.
PNA's subsidiaries include the operating entities Delta Steel, Inc., Feralloy Corporation, Infra-Metals Co., Metals Supply Company, Ltd., Precision Flamecutting and Steel, Inc. and Sugar Steel Corporation. Through its subsidiaries, PNA processes and distributes primarily carbon steel plate, bar, structural and flat-rolled products. PNA operates 21 steel service centers throughout the United States, as well as four joint ventures with six additional service centers in the United States and Mexico. PNA's net sales for the three months ended March 31, 2009 were approximately $317.3 million. Acquisition of Dynamic Metals International LLC Effective April 1, 2008, through our subsidiary Service Steel Aerospace Corp., we acquired the business of Dynamic Metals International, LLC ("Dynamic") based in Bristol, Connecticut. Dynamic was founded in 1999 and is a specialty metal distributor. Dynamic has been merged into and currently operates as a division of Service Steel

Aerospace Corp. headquartered in Tacoma, Washington. This strategic acquisition expands Reliance's existing Service Steel Aerospace specialty product offerings in the Northeastern area of the U.S. The all cash purchase price was funded with borrowings on our revolving credit facility. Dynamic's net sales for the three months ended March 31, 2009 were approximately $3.1 million.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Net Sales. In the three months ended March 31, 2009, our consolidated net sales decreased 18.3% to $1.56 billion compared to $1.91 billion for the three months ended March 31, 2008. This includes a 1.2% decrease in tons sold and a 15.7% decrease in our average selling price per ton sold. (Tons sold and average selling price per ton sold amounts exclude the toll processing sales of Precision Strip and Feralloy Corporation.) Our 2009 first quarter sales included $317.3 million from PNA Group that we acquired on August 1, 2008. The decrease in our average selling price in the 2009 first quarter is due to prices for carbon steel products falling dramatically beginning in the 2008 fourth quarter and continuing to decline through the 2009 first quarter. Prices for aluminum and stainless steel products also fell from already low levels during the second half of 2008. Due to the acquisition of PNA, our average selling price was also impacted by a change in our product mix. Carbon steel products represented 58% of our 2009 first quarter sales, compared to 47% of our 2008 first quarter sales and carbon steel products typically have lower selling prices than the other products that we sell.
Same-store sales, which exclude the sales of our 2008 acquisitions, were $1.24 billion in the 2009 first quarter, down 35.1% from the 2008 first quarter, with a 33.7% decrease in our tons sold and a 0.1% decrease in our average selling price per ton sold. The decline in our same-store tons sold in the 2009 first quarter compared to the 2008 first quarter was due to lower demand in all markets that we sell to mainly because of the global recession that significantly impacted our business activity beginning in November 2008. Comparing our 2009 first quarter to the 2008 fourth quarter, our tons sold decreased 13.9% and our average selling price was down 14.7%. Our 2008 fourth quarter volumes were favorably impacted by strong October 2008 shipment levels; otherwise, demand has remained relatively consistent with November 2008 levels through the 2009 first quarter. The decrease in average selling prices from the fourth quarter of 14.7% is primarily due to the continued price declines for carbon steel products throughout the 2009 first quarter.
Gross Profit. Total gross profit decreased 28.0% to $354.4 million for the 2009 first quarter compared to $492.3 million in the 2008 first quarter. Our gross profit as a percentage of sales in the 2009 first quarter was 22.7% compared to 25.8%, in the 2008 first quarter. Gross profit margins have been negatively impacted by mill pricing volatility experienced in 2008 which has continued through the 2009 first quarter. The rapid reduction in prices during the 2008 fourth quarter required the reduction of our selling prices to remain competitive. As a consequence of the dramatic decrease in mill prices, we, along with our competitors, went into an inventory destocking mode. The inventory destocking by the industry during a period of deteriorating customer demand resulted in significant competitive pressure in the industry, negatively impacting our gross profit margin through the 2009 first quarter.
Our 2009 first quarter gross profit margin was also impacted by our acquisition of PNA on August 1, 2008. The PNA companies have operated at lower gross profit levels historically than the Reliance companies. The net impact to our gross profit margins from PNA has been a decrease of approximately three percentage points in the 2009 first quarter. We expect to improve the margins of the PNA companies to levels more consistent with Reliance's historical levels once demand and pricing stabilize and begin to improve.
Our LIFO reserve adjustment, which is included in our cost of sales and therefore impacts gross profit in the 2009 first quarter resulted in income of $75.0 million, or $0.68 per diluted share, compared to expense of $17.5 million or $0.15 per diluted share in the 2008 first quarter. We currently estimate our full year 2009 LIFO adjustment to be a credit, or income, of $300.0 million mainly due to the significant reductions in carbon steel mill prices in the 2008 fourth quarter and through April of 2009 that will be reflected in our 2009 average inventory cost. Our LIFO reserve at December 31, 2008 was $387.8 million.
Expenses. Our 2009 first quarter warehouse, delivery, selling, general and administrative (S,G&A) expenses decreased $5.0 million, or 1.8%, from the 2008 first quarter and were 17.7% as a percentage of sales, up from 14.8% in the 2008 first quarter. On a same-store basis, our S,G&A expenses decreased $47.8 million, or 17.0% compared to the 2008 first quarter. Our cost structure is highly variable, with approximately 60% of our expenses being personnel-related. In 2009, we reduced headcount by 937, or 8.9% from December 31, 2008 levels. Since September

30, 2008, we have reduced headcount by 1,786 employees, or 15.7%. In addition to headcount reductions, several of our locations have employees working reduced hours resulting in additional cost savings. Throughout Reliance's workforce, employees have a significant portion of compensation tied to profitability. As such, the lower profitability levels in 2009 compared to 2008 have resulted in compensation cost reductions. Furthermore, in the 2009 first quarter, our SG&A expenses included $9.6 million related to potentially uncollectible customer accounts, compared to $3.3 million in the 2008 first quarter. Please see Liquidity and Capital Resources for further discussion with respect to our credit exposure on trade accounts receivables.
Depreciation expense for the 2009 first quarter was $22.8 million compared to $18.2 million in the 2008 first quarter. The increase was mostly due to the additional depreciation expense from our 2008 acquisitions along with depreciation on new assets placed in service throughout 2008 and so far in 2009. Amortization expense increased $3.8 million in the 2009 first quarter primarily due to additional amortization expense from the PNA acquisition.
Operating Income. Our 2009 first quarter operating income was $48.0 million, resulting in an operating income margin of 3.1%, compared to $189.3 million, or a 9.9% operating income margin in the same period of 2008. The decreased operating income is mainly due to lower gross profit dollars resulting from decreased sales levels and lower gross profit margins.
Other Income and Expense. Interest expense for the 2009 first quarter increased $2.7 million, or 16.3%, mainly due to the $1.1 billion of borrowings incurred to finance the acquisition of PNA on August 1, 2008.
Income Tax Rate. Our effective tax rate in the 2009 first quarter of 33.3% was lower than our 2008 first quarter rate of 37.6%. The permanent items impacting our effective tax rate did not change materially in 2009 compared to the 2008 levels. However, the same type of permanent items have a much larger favorable impact on our effective tax rate in 2009 due to our lower income levels in 2009 compared to 2008.
Net Income. Net income attributable to Reliance for the 2009 first quarter decreased $87.3 million, or 81.3%. The decrease was primarily due to lower gross profit and operating income dollars generated as a result of the global economic recession.
Liquidity and Capital Resources
At March 31, 2009, our working capital was $1.39 billion, down from $1.65 billion at December 31, 2008. In the 2009 first quarter, we continued to significantly reduce our working capital and generated $314.5 million of cash flow from operations, compared to $107.2 million in the 2008 first quarter. Our accounts receivable balance decreased $160.0 million and our inventory levels decreased $194.7 million while our accounts payable and accrued expenses decreased $90.1 million.
To manage our working capital, we focus on our days sales outstanding to monitor accounts receivable and on our inventory turnover rate to monitor our inventory levels, as receivables and inventory are our two most significant elements of working capital. As of March 31, 2009, our days sales outstanding was approximately 43 days compared to 42 days at December 31, 2008. (We calculate our days sales outstanding as an average of the most recent two-month period.) We are comfortable with our current DSO rate; however, we have noted some increased closures and bankruptcy filings in the customer end markets that we serve, as reflected in the increase in our accounts receivable reserve to $23.4 million. In the 2009 first quarter, we wrote-off $6.4 million of receivables as uncollectible, our highest quarterly amount ever. Although we anticipate further receivable write-offs, we believe that our allowance is adequate to absorb any such losses.
Our inventory turn rate during the 2009 first quarter was about 3.4 times (or 3.5 months on hand), lower than our 2008 rate of 3.9 times (or 3.1 months on hand). Customer demand has fallen off significantly and we have not been able to reduce our inventory balance as quickly as shipments have decreased. As we continue to focus on reducing inventory quantities to better match demand and we replenish our inventory with lower-cost items, our inventory turn rate should improve. Our inventory turn rate was also adversely affected by the PNA acquisition, as they historically turned their inventory at lower rates than Reliance. We expect those inventory turns to improve as we continue to focus on those businesses, and as general business conditions improve. As demand and pricing for our products increase or decrease, our working capital needs increase or decrease, respectively. Because our costs for certain metals are still declining and because we have not yet fully reduced our inventory quantities to match

current customer demand levels, we expect our working capital needs to be less in the near-term. By reducing our working capital levels, mainly inventory and accounts receivable, we should continue to generate cash flow from operations. If commodity prices and demand begin to improve, we expect to finance increases in working capital needs through operating cash flow or with borrowings on our revolving credit facility.
Our primary sources of liquidity are generally our internally generated funds from operations and our revolving credit facility. Cash flow provided by operations was $314.5 million in the three months ended March 31, 2009 compared to $107.2 million in the three months ended March 31, 2008. Our focus on reducing working capital produced our strong cash flow from operations that primarily funded our reductions of outstanding debt of $309.6 million, capital expenditures of approximately $15.2 million and dividends to our shareholders of $7.3 million during the 2009 first quarter.
Our outstanding debt (including capital lease obligations) at March 31, 2009 was $1.46 billion, down from $1.77 billion at December 31, 2008. On August 1, 2008, we increased our borrowings by approximately $1.1 billion to finance the acquisition of PNA and the related repayment or refinancing of PNA's outstanding indebtedness. We funded this with $500 million from a new senior unsecured term loan (bearing interest initially at LIBOR plus 2.25%, with quarterly principal installment payments of $18.75 million and the balance due November 9, 2011) and with borrowings under our existing credit facility (bearing interest at LIBOR plus 0.55% or the bank prime rate, due November 9, 2011). At March 31, 2009, we had $174 million borrowed on our $1.1 billion revolving credit facility.
Our net debt-to-total capital ratio was 36.9% at March 31, 2009; down from our 2008 year-end rate of 41.4% (net debt-to-total capital is calculated as total debt, net of cash, divided by Reliance shareholders' equity plus total debt, net of cash). At March 31, 2009, we had availability of $926 million on our $1.1 billion revolving credit facility. We are confident that with this level of liquidity we will be able to fund our working capital needs and service our debt in the near term; however, because of the global credit tightening, we are currently limiting our uses of cash to the most important capital expenditure items and maintaining dividends to our shareholders. Our free cash flow will primarily be used to reduce debt.
On November 20, 2006 we entered into an Indenture (the "Indenture"), for the issuance of $600 million of unsecured debt securities which are guaranteed by all of our direct and indirect, wholly-owned domestic subsidiaries and any entities that become such subsidiaries during the term of the Indenture (collectively, the "Subsidiary Guarantors"). None of our foreign subsidiaries or our non-wholly-owned domestic subsidiaries is a guarantor. The total debt issued was comprised of two tranches, (a) $350 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, maturing on November 15, 2016 and (b) $250 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036. The notes are senior unsecured obligations and rank equally with all of our other existing and future unsecured and unsubordinated debt obligations. In April 2007, these notes were exchanged for publicly traded notes registered with the Securities and Exchange Commission.
At March 31, 2009, we also had $213 million of outstanding senior unsecured notes issued in private placements of debt. The outstanding senior notes bear interest at an average fixed rate of 5.7% and have an average remaining life of 2.7 years, maturing from 2010 to 2013. In early January 2009, $10 million of these notes matured and were paid off.
We also have two separate revolving credit facilities for operations in Canada with a combined credit limit of CAD$35 million. There were no borrowings outstanding on these credit facilities at March 31, 2009 and December 31, 2008. Two other separate revolving facilities are in place for operations in China and another one for operations in the United Kingdom with total combined outstanding balances of $6.1 million and $7.5 million at March 31, 2009 and December 31, 2008, respectively.
Our $1.1 billion syndicated credit facility, $500 million senior unsecured term loan and senior notes collectively require that we maintain a minimum net worth and interest coverage ratio, and a maximum leverage ratio and include change of control provisions, among other things. The interest coverage ratio for the last twelve-month period ended March 31, 2009 was approximately 8.3 times compared to the debt covenant minimum requirement of 3.0 times (interest coverage ratio is calculated as net income attributable to Reliance plus interest expense and provision for income taxes, less equity in earnings of unconsolidated subsidiaries, divided by interest expense). The leverage ratio at March 31, 2009 calculated in accordance with the terms of the credit agreement was 38.2% compared to the debt covenant maximum amount of 60% (leverage ratio is calculated as total debt, inclusive of

capital lease obligations and outstanding letters of credit, divided by Reliance shareholders' equity plus total debt). The minimum net worth requirement at March 31, 2009 was $913.6 million compared to the Reliance shareholders' equity balance of $2.44 billion at March 31, 2009.
All of our wholly-owned domestic subsidiaries, which constitute the substantial majority of our subsidiaries, guarantee the borrowings under our $1.1 billion revolving credit facility, the term loan and our private placement notes. The requirement with respect to the subsidiary guarantors is that they collectively account for at least 80% of consolidated EBITDA and 80% of consolidated tangible assets. Reliance and the subsidiary guarantors accounted for approximately 97% of our consolidated EBITDA for the last twelve months and approximately 95% of total consolidated tangible assets. The Company was in compliance with all additional debt covenants at March 31, 2009.
Capital expenditures were $15.2 million for the three months ended March 31, 2009 compared to $36.0 million during the same prior year period. We had no material changes in commitments for capital expenditures, operating lease obligations or purchase obligations as of March 31, 2009, as compared to those disclosed in our table of contractual obligations included in our Annual Report on Form 10-K for the year ended December 31, 2008.
On February 19, 2009, our Board of Directors declared a regular quarterly cash dividend of $.10 per share of common stock. On April 21, 2009 our Board of Directors declared the 2009 second quarter cash dividend of $.10 per share. We have paid regular quarterly dividend payments to our shareholders for 49 consecutive years.
In May 2005, our Board of Directors amended and restated our stock repurchase program authorizing the repurchase of up to an additional 12.0 million shares of our common stock, of which, 7.9 million shares remain available for repurchase as of March 31, 2009. Repurchased shares are treated as authorized but unissued shares. We repurchased approximately 2.4 million shares of our common stock during the 2008 first quarter, at an average cost of $46.97 per share. We did not repurchase any shares of our common stock in the 2009 first quarter. Since initiating our Stock Repurchase Plan in 1994, we have repurchased approximately 15.2 million shares at an average cost of $18.41 per share. We believe such purchases, given appropriate circumstances, enhance shareholder value and reflect our confidence in the long-term growth potential of our Company. 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 may be in seasonal businesses, especially customers in the construction industry. As a result of our geographic, product and customer diversity, our operations have not shown any material seasonal trends except that revenues in the months of July, November and December traditionally have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from vacation and holiday closures at some of our customers. We cannot assure you that period-to-period fluctuations will not occur in the future. The results of any one or more quarters are therefore not necessarily indicative of annual results. Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $1.07 billion at March 31, 2009, or approximately 22.2% of total assets, or 43.7% of Reliance shareholders' equity. Pursuant to SFAS No. 142, we review the recoverability of goodwill and other intangible assets deemed to have indefinite lives annually or whenever significant events or changes occur which might impair the recovery of recorded amounts. Most recently completed annual impairment tests of goodwill were performed as of November 1, 2008 and it was determined that the recorded amounts for goodwill are recoverable and that no impairment existed. Our 2009 annual impairment tests of goodwill will be performed as of November 1, 2009 or more frequently, as appropriate. Other intangible assets with finite useful lives continue to be amortized over their useful lives. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.

Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and the current changing market conditions may impact our assumptions as to commodity prices, demand and future growth rates or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. Furthermore, continuous declines in the market conditions for our products as well as significant decreases in the price of our common stock could also impact our impairment analysis. However, as of March 31, 2009, we have noted no indications of impairment. Critical Accounting Policies
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. generally accepted accounting principles. When we prepare these 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. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, goodwill and 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. Actual results may differ from these estimates under different assumptions or conditions.
For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements see our December 31, 2008 Annual Report on Form 10-K. We do not believe that any of the new accounting standards implemented during 2009 changed our critical accounting policies.
New Accounting Pronouncements
See Notes to Consolidated Financial Statements for disclosure on new accounting pronouncements.
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 and availability. There have been no significant changes in our market risk factors since December 31, 2008. Please refer to Item 7A - Quantitative and Qualitative Disclosures About Market Risk, contained in our December 31, 2008 Annual Report on Form 10-K for further discussion on quantitative and qualitative disclosures about market risk. 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) or 15d-15(e) under the Securities Act of 1934, as amended. 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. There have been no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Form 10-Q may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors . . .