Three Months and Nine Months Ended September 30, 2009 Compared to Three Months and Nine Months Ended September 30, 2008 The following table sets forth certain income statement data for the three- and nine-month periods ended September 30, 2009 and 2008 (dollars are shown in thousands and certain amounts may not calculate due to rounding):

                                          Three Months Ended September 30,                                         Nine Months Ended September 30,
                                      2009                                2008                                2009                                2008
                                               % of                                % of                                % of                                % of
                               $             Net Sales             $             Net Sales             $             Net Sales             $             Net Sales
Net Sales                 $ 1,243,373             100.0 %     $ 2,572,836             100.0 %     $ 4,044,886             100.0 %     $ 6,576,074             100.0 %
Cost of Sales
(exclusive of
depreciation and
amortization expense
shown below)                  886,904              71.3         1,948,788              75.7         3,051,090              75.4         4,872,813              74.1
Gross Profit (1)              356,469              28.7           624,048              24.3           993,796              24.6         1,703,261              25.9
S,G&A Expenses                251,761              20.2           327,822              12.7           776,270              19.2           907,024              13.8
Depreciation Expense           21,888               1.8            20,745               0.8            67,259               1.7            57,316               0.9
Amortization Expense            8,537               0.7             6,265               0.2            22,593               0.6            12,504               0.2

Operating Income          $    74,283               6.0 %     $   269,216              10.5 %     $   127,674               3.2 %     $   726,417              11.0 %

(1) Gross Profit, calculated as Net Sales less Cost of Sales, and Gross Profit Margin, calculated as Gross Profit divided by Net Sales, are non-GAAP financial measures as they exclude depreciation and amortization expense associated with the corresponding sales. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform "first-stage" processing which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, are not significant and are excluded from our Cost of Sales. Therefore, our Cost of Sales is primarily comprised of the cost of the material we sell. The Company uses Gross Profit and Gross Profit Margin as shown above as measures of operating performance. Gross Profit and Gross Profit Margin are important operating and financial measures, as fluctuations in our Gross Profit Margin can have a significant impact on our earnings. Gross Profit and Gross Profit Margin, as presented, are not necessarily comparable with similarly titled measures for other companies.

Net Sales. In the three months ended September 30, 2009, our consolidated net sales decreased 51.7% to $1.24 billion from our record quarterly sales of $2.57 billion for the three months ended September 30, 2008. This includes a 26.4% decrease in tons sold and a 34.1% 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, Inc. and Feralloy Corporation.) In the nine months ended September 30, 2009, our consolidated net sales decreased 38.5% to $4.04 billion from our record sales of $6.58 billion for the nine months ended September 30, 2008. This includes a 12.7% decrease in tons sold and a 28.6% decrease in our average selling price per ton sold. Our sales for the three- and nine-month periods ended September 30, 2009 included $230.4 million and $797.5 million, respectively, from PNA that we acquired on August 1, 2008. The three- and nine- month periods ended September 30, 2008 included $421.5 million in net sales from PNA.
Our average selling prices have declined mainly because of the significant mill price reductions for most products that we sell during 2009 compared to the 2008 periods. Prices for most carbon steel products were rising significantly during the first half of 2008 and reached record levels in July 2008. Subsequently, prices fell rapidly beginning in the 2008 fourth quarter and continued to decline through the first half of 2009. In the 2009 third quarter there were modest increases in mill prices for certain products. Since prices in the 2008 third quarter were at historical highs for most products we sell, the decline in our 2009 third quarter average selling prices from the 2008 third quarter is greater than the decline in the nine-month period. Also, a change in our product mix towards a higher proportion of carbon steel products resulting from the acquisition of PNA contributed to the reduction in our average selling price per ton for the nine-months ended September 30, 2009 compared to the same 2008 period. Carbon steel products, which typically have lower selling prices than other products that we sell, represented 56% of our 2009 nine-month sales, compared to 53% of our sales in the same period in 2008.

Same-store sales, which exclude the sales of our 2008 acquisitions, were $1.01 billion in the 2009 third quarter, down 53.0% from the 2008 third quarter, with a 32.9% decrease in our tons sold and a 29.5% decrease in our average selling price per ton sold. Same-store sales were $3.24 billion in the 2009 nine-month period, down 47.3% from the 2008 nine-month period, with a 35.2% decrease in our tons sold and a 17.5% decrease in our average selling price per ton sold.
The decline in our same-store tons sold was due to the lower demand in all markets that we sell to mainly because of the global economic recession that significantly impacted our business activity beginning in November 2008. According to the Metals Service Center Institute, tons sold for the 2009 nine-month period were down approximately 41% for the metals service center industry in North America compared to the 2008 nine-month period.
Cost of Sales. In the three months ended September 30, 2009, our cost of sales decreased 54.5% to $886.9 million compared to $1.95 billion for the three months ended September 30, 2008. In the nine months ended September 30, 2009, our cost of sales decreased 37.4% to $3.05 billion from $4.87 billion for the nine months ended September 30, 2008. The decrease in cost of sales in the 2009 periods compared to 2008 is due to decreases in tons sold resulting from the global economic recession along with decreases in mill prices, which impact our cost, that began in the 2008 fourth quarter and continued to decline through the first half of 2009.
Also, our LIFO reserve adjustment, which is included in our cost of sales, resulted in a credit, or income of $67.5 million in the 2009 third quarter compared to a charge, or expense of $79.0 million in the 2008 third quarter. Our LIFO reserve adjustment in the 2009 nine-month period resulted in a credit, or income of $217.5 million compared to a charge, or expense of $136.5 million in the 2008 nine-month period.
We currently estimate our full year 2009 LIFO adjustment to be a credit, or income, of $290.0 million mainly due to the significant reductions in carbon steel prices that will be reflected in our 2009 year-end average inventory cost compared to the 2008 year-end, as well as the significant reductions in our inventory quantities from December 31, 2008. Our LIFO reserve at September 30, 2009 and December 31, 2008 was $170.3 million and $387.8 million, respectively.
Gross Profit. Total gross profit decreased 42.9% to $356.5 million for the 2009 third quarter, compared to $624.0 million in the 2008 third quarter. Our gross profit as a percentage of sales in the 2009 third quarter was 28.7%, compared to 24.3% in the 2008 third quarter. Total gross profit decreased 41.7% to $993.8 million for the 2009 nine-month period compared to $1.70 billion in the 2008 nine-month period. Our gross profit as a percentage of sales in the 2009 nine-month period was 24.6% compared to 25.9% in the 2008 nine-month period.
During most of the nine-month period ended September 30, 2009, we were selling higher cost inventory into a declining price market that significantly reduced our gross profit margins. In the 2009 third quarter, we were in an environment of improving prices and we began purchasing more metal from mills at current replacement costs as our inventory levels better matched our shipment levels, resulting in improved 2009 third quarter gross profit margins. Our LIFO reserve adjustment that was income, or a credit to cost of sales in the 2009 periods compared to expense, or a charge, in the 2008 periods also impacted our gross profit margins. See "Cost of Sales" above for discussion of our LIFO reserve adjustments.
Our 2009 gross profit margins were also impacted by our acquisition of PNA on August 1, 2008. The PNA companies have historically operated at lower gross profit levels than the Reliance companies. 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.
Expenses. Our 2009 third quarter warehouse, delivery, selling, general and administrative (S,G&A) expenses decreased $76.1 million, or 23.2%, from the 2008 third quarter and were 20.2% as a percentage of sales, up from 12.7% in the 2008 third quarter. On a same-store basis, our S,G&A expenses decreased $71.3 million, or 25.2% compared to the 2008 third quarter. Our 2009 nine-month period S,G&A expenses decreased $130.8 million, or 14.4%, from the 2008 nine-month period and were 19.2% as a percentage of sales, up from 13.8% in the 2008 nine- month period. On a same-store basis, our S,G&A expenses decreased $209.1 million, or 24.3% compared to the

2008 nine-month period. Our expenses as a percent of sales for the three- and nine-month periods ended September 30, 2009 increased substantially because of our lower sales compared to the same periods in 2008.
Our cost structure is highly variable, with about 60% of our expenses personnel-related. In the 2009 nine-month period, we reduced our workforce by approximately 1,600 employees, or 15.6%. In the past twelve months, we have reduced our workforce by approximately 2,400 employees, or 21.2%. In addition to the headcount reductions, we have many employees working reduced hours resulting in additional savings. Further, throughout our workforce, employees have a significant portion of compensation tied to profitability. Because of the lower profitability levels in 2009 our compensation expense has declined. Additionally, our expenses for the 2009 three- and nine-month periods include $3.5 million and $14.9 million, respectively, related to potentially uncollectible accounts receivable, increases of $5.6 million and $10.1 million from the 2008 three- and nine-month periods, respectively. In the 2009 nine-month period, we wrote-off $16.3 million of customer receivables as uncollectible. Our full year 2008 write-offs were $8.1 million. Our allowance for uncollectible accounts at September 30, 2009 was $21.3 million. Although we anticipate some further receivable write-offs, we believe that our allowance is adequate to absorb any such losses.
Depreciation expense for the 2009 third quarter was $21.9 million compared to $20.7 million in the 2008 third quarter. Depreciation expense for the 2009 nine-month period was $67.3 million compared to $57.3 million in the 2008 nine-month period. The increase was mostly due to the additional depreciation expense from the PNA acquisition along with depreciation on new assets placed in service throughout 2008 and so far in 2009. Amortization expense increased $2.3 million or 36.3% in the 2009 third quarter mostly due to the write-off of $1.6 million of deferred financing costs related to our $500 million term loan that was paid off in September 2009. The $10.1 million, or 80.7%, increase in amortization expense in the 2009 nine-month period was primarily due to additional amortization expense from the PNA acquisition.
Operating Income. Our 2009 third quarter operating income was $74.3 million, resulting in an operating income margin of 6.0%, compared to $269.2 million, or a 10.5% operating income margin in the same period for 2008. Our 2009 nine-month period operating income was $127.7 million, resulting in an operating income margin of 3.2%, compared to $726.4 million, or an 11.0% operating income margin in the same period of 2008. The lower sales amounts combined with our compressed gross profit margins in the 2009 periods have significantly reduced our operating income. However, our operating income in the 2009 third quarter is the strongest level in 2009.
Other Income and Expense. Interest expense for the 2009 third quarter decreased $8.0 million, or 33.4% compared to the 2008 third quarter. Interest expense for the 2009 nine-month period decreased $4.7 million, or 8.4% compared to the same period of 2008. The decreases were mainly due to our repayment of over $1 billion of borrowings on the $1.1 billion revolving credit facility during the 2008 fourth quarter and through the first nine months of 2009.
Income Tax Rate. Our effective tax rate in the 2009 third quarter was 31.6% compared to our 2008 third quarter rate of 37.6%. Our effective tax rate in the 2009 nine-month period was 31.1% compared to our 2008 nine-month rate of 37.6%. The permanent items impacting our effective tax rate did not change materially in amount in 2009 compared to the 2008 levels. However, the same type of permanent items have a much greater impact on our effective rate in 2009 due to the lower income levels in 2009.
Net Income. Net income attributable to Reliance decreased $110.7 million, or 72.6%, and $360.4, or 86.5%, for the three- and nine-months ended September 30, 2009, respectively. The decreases were primarily due to lower sales, gross profit and operating income dollars generated as a result of the global economic recession.
Liquidity and Capital Resources
Operating Activities
At September 30, 2009, our working capital was $1.13 billion, down from $1.65 billion at December 31, 2008. In the 2009 nine-month period, we continued to significantly reduce our working capital and generated $807.2 million of cash flow from operations, compared to $115.4 million in the 2008 nine-month period. In the environment of declining demand and pricing that we have been experiencing since November 2008, our working capital needs have decreased significantly. The majority of our $807.2 million of cash flow generated from operations came from

working capital reductions. Decreases of $266.5 million in our accounts receivable balance and $709.9 million in our FIFO inventory level were the primary contributors to our record cash flows from operations during the 2009 nine-month period.
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 the two most significant elements of our working capital. As of September 30, 2009, our days sales outstanding was approximately 43 days compared to 42 days at December 31, 2008. (We calculate our days sales outstanding ("DSO") as an average of the most recent two-month period.) Our DSO has trended up as sales have decreased and we have seen some of our customers pay us more slowly. Despite the slight increase in our DSO, our accounts receivable balance has decreased significantly from December 31, 2008 due to lower sales levels in 2009.
Our inventory turn rate during the 2009 nine-month period was about 3.5 times (or 3.4 months on hand), compared to our 2008 rate of 3.9 times (or 3.1 months on hand). Because customer demand decreased so dramatically and continued to fall, we were not able to reduce our inventory balance as quickly as our shipments decreased. Although our inventory turn rates have deteriorated somewhat during 2009, our efforts to better align our inventory quantities on hand with our current demand levels, as well as the impact of lower mill pricing for most of our products during 2009 compared to December 31, 2008 levels, have contributed to the overall decrease of $709.9 million in our FIFO inventories.
Our inventory turns have also declined somewhat because of our 2008 acquisition of PNA, as PNA historically turned inventory at lower rates than Reliance. We expect those inventory turns to improve as we continue to focus on those businesses, and as business conditions improve.
When commodity prices or 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. Investing Activities
Capital expenditures were $55.0 million for the nine months ended September 30, 2009 compared to $119.5 million during the same period of 2008. Our 2009 capital expenditures are budgeted at approximately $95 million, which was significantly reduced from the 2008 capital expenditures budget of $210 million. Because of the global economic recession, we cut back on our actual capital expenditures during the 2008 fourth quarter and reduced our 2009 capital expenditures budget significantly to focus on key growth initiatives to expand or relocate existing facilities and to maintain, add or upgrade equipment.
Financing Activities
Our strong cash flow from operations funded our reductions of outstanding debt of $696.5 million and dividends to our shareholders of $22.0 million during the 2009 nine-month period. On October 21, 2009, our Board of Directors declared the 2009 fourth quarter cash dividend of $.10 per share. We have paid regular quarterly dividends 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 September 30, 2009. Repurchased shares are treated as authorized but unissued shares. We did not repurchase any shares of our common stock in the 2009 nine-month period. We repurchased approximately 2.4 million shares of our common stock during the 2008 nine-month period, at an average cost of $46.97 per share. 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.
Liquidity
Our primary sources of liquidity are generally our internally generated funds from operations and our revolving credit facility. Cash flow provided by operations was a record $807.2 million in the nine months ended September 30, 2009 compared to $115.4 million in the nine months ended September 30, 2008.

Our outstanding debt (including capital lease obligations) at September 30, 2009 was $1.07 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 through cash consideration and the related repayment or refinancing of PNA's outstanding indebtedness. We funded this by raising $500 million from a senior unsecured term loan, which we paid off and terminated in September 2009 with borrowings under our existing credit facility and cash on hand.
On September 28, 2009, we amended our $1.1 billion credit facility to adjust certain financial covenants. Our interest coverage ratio requirement was reduced to a minimum 2.0 times from 3.0 times and our leverage ratio requirement was reduced to a maximum of 50% from a maximum of 60% until June 30, 2010, at which time these ratios adjust back to the pre-amendment levels. With the amendment, our pricing was adjusted to market rates. Restrictions were placed on certain uses of cash including cash used for acquisitions, dividends, investments and stock repurchases through June 30, 2010. Additionally, with the amendment of our credit facility, we extended the maturity date of the revolving credit facility by one year from November 2011 to November 2012 for $1.02 billion of commitments. Concurrent with the amendment and extension of our revolving credit facility, we also paid off the remaining balance on our term loan of $443.8 million with $193.8 million of cash on hand and $250 million of borrowings on our revolving credit facility. Over the past twelve months, we have paid down approximately $1.2 billion of debt with cash flow from operations and increased our cash position to approximately $87.9 million at September 30, 2009. At September 30, 2009, we had $250 million in outstanding borrowings on our $1.1 billion revolving credit facility.
Our net debt-to-total capital ratio was 28.3% at September 30, 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 September 30, 2009, we had availability of $850.0 million on our revolving credit facility.
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 September 30, 2009, we also had $213.0 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 2.2 years, maturing from 2010 to 2013. In early January 2009, $10.0 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 September 30, 2009 and December 31, 2008. Various other separate revolving credit facilities are in place for our operations in Asia and for our operations in the United Kingdom with total combined outstanding balances of $6.8 million and $7.4 million at September 30, 2009 and December 31, 2008, respectively.
Our $1.1 billion syndicated credit facility 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 September 30, 2009 was approximately 3.3 times compared to the debt covenant minimum requirement of 2.0 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 and plus or minus any non-operating non-recurring loss or gain, respectively, divided by interest expense). The leverage ratio at September 30, 2009 calculated in accordance with the terms of the credit agreement was 31.0% compared to the debt covenant maximum amount of 50% (leverage ratio is calculated as total debt, inclusive of capital lease obligations and outstanding letters of credit, divided by Reliance

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