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RS > SEC Filings for RS > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for RELIANCE STEEL & ALUMINUM CO

Form 10-Q for RELIANCE STEEL & ALUMINUM CO


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has no control. These risk factors and additional information are included in our Annual Report on Form 10-K for the year ended December 31, 2011.

2012 Acquisitions

Effective October 1, 2012, through our wholly-owned subsidiary Feralloy Corporation ("Feralloy"), we acquired all the outstanding capital stock of GH Metal Solutions, Inc. (formerly known as The Gas House, Inc.) ("GH"), a value added processor and fabricator of carbon steel products that will allow Feralloy to better serve the increasing demands of its diverse customer base. GH, located in Fort Payne, Alabama, was founded in 1958 and has grown its processing equipment to include flat-bed lasers, tube lasers, torches, shears, automatic band saws, CNC press brakes, coil-fed and hand-fed stampers, robotic and manual welders, and a painting line. GH's sales were approximately $44 million for the year ended December 31, 2011. GH will operate as a wholly-owned subsidiary of Feralloy.

Effective October 1, 2012, we acquired all the outstanding limited liability company interests of Sunbelt Steel Texas, LLC ("Sunbelt"), a value added distributor of special alloy steel bar and heavy-wall tubing products to the oil and gas industry. Sunbelt was founded in 1986 and is headquartered in Houston, Texas with an additional location in Lafayette, Louisiana. Sunbelt increases our growing exposure to the energy market in high end, niche products serving customers across multiple oil and gas well drilling types, including vertical, horizontal, directional, and deepwater drilling applications. Net sales of Sunbelt for the twelve months ended December 31, 2011 were approximately $48 million. Sunbelt will operate as a wholly-owned subsidiary of Reliance Steel & Aluminum Co.

On July 6, 2012, we acquired substantially all of the assets of Airport Metals (Australia) Pty Ltd, a subsidiary of Samuel Son & Co., Limited, through our newly-formed subsidiary Bralco Metals (Australia) Pty Ltd. Airport Metals (Australia), based in Melbourne, operates as a stocking distributor of aircraft materials and supplies. The addition of Airport Metals is our first entry into Australia and enhances our ability to service important aerospace customers in that area.

Effective April, 27, 2012, through our wholly-owned subsidiary Precision Strip, Inc., we acquired the assets of the Worthington Steel Vonore, Tennessee plant, a processing facility owned by Worthington Industries, Inc. The Vonore plant operates as a Precision Strip, Inc. location which processes and delivers carbon steel, aluminum and stainless steel products on a "toll" basis, processing the metal for a fee without taking ownership of the metal. The addition of the Vonore location to our existing footprint of facilities allows us to better service our customer base in an important geographic area of the country.

Effective April 3, 2012, we acquired all the outstanding limited liability company interests of National Specialty Alloys, LLC ("NSA"), a global specialty alloy processor and distributor of premium stainless steel and nickel alloy bars and shapes, headquartered in Houston, Texas. In addition to enhancing our existing product offerings with the addition of specialty stainless steel and nickel products, NSA also expands and complements our growing exposure to the energy market. NSA was founded in 1985 and has additional locations in Anaheim, California; Buford, Georgia and Tulsa, Oklahoma. Net sales of NSA during the period from April 3, 2012 through September 30, 2012 were approximately $47.4 million.

Effective February 1, 2012, through our wholly-owned subsidiary Diamond Manufacturing Company, we acquired McKey Perforating Co., Inc. ("McKey"), headquartered in New Berlin, Wisconsin and its subsidiary, McKey Perforated Products Co., Inc., located in Manchester, Tennessee. McKey was founded in 1867 and provides a full range of metal perforating and fabrication services to customers located primarily in the U.S. McKey will be working closely with Diamond Manufacturing Company to leverage their combined expertise in the perforated metal market and further expand our presence within that market. McKey had net sales of $14.5 million for the eight months ended September 30, 2012.

2011 Acquisition

Effective August 1, 2011, we acquired all the outstanding capital securities of Continental Alloys & Services, Inc. ("Continental"), headquartered in Houston, Texas, and certain affiliated companies for a combined transaction value of approximately $440.8 million, which included the assumption and repayment of $104.7 million of debt.


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We funded this acquisition with borrowings on our revolving credit facility. Continental is a leading global materials management company focused on high-end steel and alloy pipe, tube and bar products and precision manufacturing of various tools designed for well completion programs of global energy service companies and has 12 locations in seven countries including Canada, Malaysia, Mexico, Singapore, the U.A.E., the United Kingdom, and the United States. This acquisition aligns well with our diversification strategy by increasing our growing exposure to the energy market, including the addition of Oil Country Tubular Goods ("OCTG") products, new processing capabilities, and entry into new international markets. Continental and its affiliates had combined net sales of approximately $337.0 million for the nine months ended September 30, 2012.

Three Months and Nine Months Ended September 30, 2012 Compared to Three Months and Nine Months Ended September 30, 2011

The following table sets forth certain income statement data for the three-month and nine-month periods ended September 30, 2012 and 2011 (dollars are shown in millions and certain amounts may not calculate due to rounding):

                                        Three Months Ended September 30,                         Nine Months Ended September 30,
                                        2012                        2011                        2012                        2011
                                              % of                        % of                        % of                        % of
                                  $         Net Sales         $         Net Sales         $         Net Sales         $         Net Sales
Net sales                     $ 2,055.3         100.0 %   $ 2,138.6         100.0 %   $ 6,553.3         100.0 %   $ 6,100.8         100.0 %

Cost of sales (exclusive of
depreciation and
amortization expense shown
below)                          1,520.0          74.0       1,644.7          76.9       4,870.8          74.3       4,589.8          75.2

Gross profit (1)                  535.3          26.0         493.9          23.1       1,682.5          25.7       1,511.0          24.8

Warehouse, delivery,
selling, general and
administrative expense
("S,G&A")                         345.4          16.8         319.6          14.9       1,049.8          16.0         951.8          15.6

Depreciation expense               26.6           1.3          24.1           1.1          77.7           1.2          72.8           1.2

Amortization expense               10.7           0.5          10.1           0.5          31.6           0.5          25.9           0.4

Operating income              $   152.6           7.4 %   $   140.1           6.6 %   $   523.4           8.0 %   $   460.5           7.5 %

(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. We use 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 and 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.


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Net Sales



                                          September 30,              Dollar      Percentage
                                       2012           2011           Change        Change
                                          (in millions)
Net sales (three months ended)      $  2,055.3     $  2,138.6      $   (83.3)        (3.9%)
Net sales (nine months ended)       $  6,553.3     $  6,100.8      $   452.5          7.4%
Net sales, same-store (three
months ended)                       $  1,914.9     $  2,050.3      $  (135.4)        (6.6%)
Net sales, same-store (nine
months ended)                       $  6,152.9     $  6,012.4      $   140.5          2.3%

                                          September 30,               Tons       Percentage
                                       2012           2011           Change        Change
                                         (in thousands)
Tons sold (three months ended)         1,105.9        1,083.7            22.2          2.0%
Tons sold (nine months ended)          3,425.8        3,157.8           268.0          8.5%
Tons sold, same-store (three
months ended)                          1,073.0        1,058.3            14.7          1.4%
Tons sold, same-store (nine
months ended)                          3,326.4        3,132.5           193.9          6.2%

                                          September 30,            Price/Ton     Percentage
                                       2012           2011           Change        Change
Average selling price per ton
sold (three months ended)           $    1,848     $    1,973      $    (125)        (6.3%)
Average selling price per ton
sold (nine months ended)            $    1,908     $    1,931      $     (23)        (1.2%)
Average selling price per ton
sold, same-store (three months
ended)                              $    1,775     $    1,937      $    (162)        (8.4%)
Average selling price per ton
sold, same-store (nine months
ended)                              $    1,845     $    1,918      $     (73)        (3.8%)

Tons sold and average selling price per ton sold amounts exclude our toll processing sales. Same-store amounts exclude the results of our 2012 and 2011 acquisitions.

In general, business activity in most all of our markets served is better in 2012 than in the same period in 2011, albeit, the improvement in tons shipped has decreased sequentially in each of the quarters in 2012 over the same periods in 2011. In 2012, our strongest markets continue to be aerospace, farm and heavy equipment, and auto (through our toll processing businesses). Energy (oil & gas), although down a little from 2011 levels, still continues to be one of our strongest markets. These end markets continue to offset weakness in non-residential construction. Non-residential construction continues to exhibit signs of a recovery, although at significantly reduced demand levels from its peak in 2006.

Since we primarily purchase and sell our inventories in the "spot" market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. The mix of products sold can also have an impact on our average selling prices. Our 2011 and 2012 acquisitions, particularly Continental and NSA who specialize in various alloy steel products, favorably impacted our 2012 three- and nine-month period average selling prices as their specialty products have higher selling prices than our company average; however, not enough to offset the overall decline in our selling prices.

Our 2012 same-store three- and nine-month period average selling prices declined from the same periods in 2011 due to lower mill pricing for most of our products as a result of decreases in raw material and scrap costs at the mills as well as high import levels and domestic overcapacity that needed to be absorbed in the marketplace. Lower London Metal Exchange aluminum prices and reduced nickel surcharges were primarily responsible for the drop in common alloy aluminum and stainless steel prices, respectively.

Our major commodity same-store selling prices changed during the three-month period ended September 30, 2012 from the same period in 2011 as follows: carbon steel down 8.3%; aluminum down 5.7%; stainless steel down 13.2%; and alloy up 0.2%. For the 2012 nine-month period, our same-store average selling prices changed from the same period in 2011 as follows: carbon steel down 2.9%; aluminum down 2.1%; stainless steel down 10.4%; and alloy up 3.5%. As carbon steel sales represent slightly more than 50% of our sales dollars, changes in carbon steel prices have a significant impact on changes in our overall average price per ton sold.

Cost of Sales



                                             September 30,
                                     2012                     2011
                                           % of                     % of        Dollar      Percentage
                                $        Net Sales       $        Net Sales     Change        Change
                                         (dollars in millions)
Cost of sales (three
months ended)               $ 1,520.0        74.0%   $ 1,644.7        76.9%     $ (124.7)       (7.6%)
Cost of sales (nine
months ended)               $ 4,870.8        74.3%   $ 4,589.8        75.2%     $  281.0         6.1%

The decrease in cost of sales in the three-month period ended September 30, 2012 compared to the same 2011 period is primarily due to the decrease in the cost of materials we purchase, offset by the slight improvement in our tons sold. The increase in cost of sales in the nine-month period ended September 30, 2012 compared to the same 2011 period is primarily due to the increase in tons sold, offset with slightly lower product costs. The decrease in cost of sales as a percent of net sales in the 2012 three- and nine-month periods is due to our selling prices decreasing at a lower rate compared to the decrease in our replacement costs. See "Net Sales" above for trends in both demand and costs of our products and the discussion below on our LIFO inventory valuation adjustments and related impact on cost of sales.

Our LIFO reserve adjustment, which is included in our cost of sales and, in effect, reflects cost of sales at current replacement costs, resulted in a credit, or income, of $27.0 million in the three-month period ended September 30, 2012 compared to a charge, or expense, of $22.5 million in the same period in 2011. Our LIFO reserve adjustment in the 2012 nine-month period resulted in a credit, or income, of $27.0 million compared to a charge, or expense, of $67.5 million in the 2011 nine-month period.


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We currently estimate our year-end LIFO adjustment to be a credit, or income, of $36.0 million as we expect that our average cost of inventory at December 31, 2012 will be lower than at January 1, 2012.

Gross Profit



                                                    September 30,
                                            2012                    2011
                                                  % of                    % of       Dollar    Percentage
                                        $       Net Sales       $       Net Sales    Change      Change
                                                (dollars in millions)
Gross profit (three months ended)   $   535.3       26.0%   $   493.9       23.1%    $  41.4         8.4%
Gross profit (nine months ended)    $ 1,682.5       25.7%   $ 1,511.0       24.8%    $ 171.5        11.4%

The increase in our gross profit levels in the three-month and nine-month periods ended September 30, 2012 is due to fluctuations in gross profit margin resulting from changing commodity prices that impact the cost of materials we purchase as well as LIFO adjustments, which in effect reflect cost of sales at current replacement costs. Additionally, higher sales levels also contributed to the increase in our gross profit levels in the nine-month period ended September 30, 2012. See "Net Sales" and "Cost of Sales" for discussion on product pricing trends and our LIFO reserve adjustments, respectively.

Expenses



                                                   September 30,
                                            2012                    2011
                                                  % of                   % of      Dollar    Percentage
                                       $        Net Sales      $       Net Sales   Change      Change
                                               (dollars in millions)
S,G&A expense (three months
ended)                             $   345.4        16.8%   $ 319.6        14.9%   $  25.8         8.1%
S,G&A expense (nine months
ended)                             $ 1,049.8        16.0%   $ 951.8        15.6%   $  98.0        10.3%
S,G&A expense, same-store (three
months ended)                      $   326.3        17.0%   $ 313.0        15.3%   $  13.3         4.2%
S,G&A expense, same-store (nine
months ended)                      $   998.9        16.2%   $ 945.2        15.7%   $  53.7         5.7%
Depreciation & amortization
expenses (three months ended)      $    37.3         1.8%   $  34.2         1.6%   $   3.1         9.1%
Depreciation & amortization
expenses (nine months ended)       $   109.3         1.7%   $  98.7         1.6%   $  10.6        10.7%

The additional expenses of our 2012 and 2011 acquisitions along with increases in certain warehouse and delivery expenses resulting from increased staffing levels due to improved demand accounted for most of the increase in S,G&A expense during the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. Our three-month ended September 30, 2012 S,G&A expense as a percent of net sales increased as compared to the same period in 2011 primarily due to the lower selling prices in 2012 compared to 2011, causing our 2012 three-month period net sales to decline compared to the same period in 2011 even though our volumes were up slightly.

The increase in depreciation and amortization expense was mainly due to our 2012 and 2011 acquisitions and depreciation expense from our recent capital expenditures.

Operating Income



                                                September 30,
                                         2012                   2011
                                              % of                   % of      Dollar     Percentage
                                    $       Net Sales      $       Net Sales   Change       Change
                                            (dollars in millions)
Operating income (three months
ended)                           $ 152.6         7.4%   $ 140.1         6.6%   $  12.5          8.9%
Operating income (nine months
ended)                           $ 523.4         8.0%   $ 460.5         7.5%   $  62.9         13.7%

The higher gross profit dollars, offset by only moderate increases in S,G&A expense, and the contributions of our 2011 and 2012 acquisitions improved our operating income level in the three-and nine-month periods ended September 30, 2012. Our operating income returns improved slightly in the 2012 periods mainly because of our improved gross profit margins and contributions from our 2012 and 2011 acquisitions, which produce higher operating returns due to the specialty nature of their products and processing services.


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Other Income (Expense)



                                            September 30,
                                     2012                    2011
                                           % of                   % of      Dollar     Percentage
                                $        Net Sales      $       Net Sales   Change       Change
                                        (dollars in millions)
Other income (expense),
net (three months ended)     $   5.9          0.3%   $ (6.5)       (0.3%)   $  12.4      (190.8%)
Other income (expense),
net (nine months ended)      $   8.9          0.1%   $ (2.2)        0.0%    $  11.1      (504.5%)

The changes in other income (expense), net in the three-month and nine-month periods ended September 30, 2012 compared to the same periods in 2011 were primarily due to higher foreign currency gains due to the weakening of the U.S. dollar in 2012 compared to the same periods in 2011, higher gains from sales of property, plant, and equipment, timing of life insurance proceeds and investment returns on our life insurance assets.

Income Tax Rate

Our effective income tax rates for the three-month periods ended September 30, 2012 and 2011 were 30.9% and 27.2%, respectively. Our effective income tax rates for the nine-month periods ended September 30, 2012 and 2011 were 32.9% and 32.2%, respectively. Permanent items that lowered our effective income tax rates from the federal statutory rate were not materially different in amounts during these periods and relate mainly to company-owned life insurance policies, domestic production activities deductions and foreign income levels that are taxed at lower rates. The increase in the 2012 three-month period effective income tax rate compared to the same period in 2011 is primarily attributable to changes in our blended state income tax rate based on shifts in our income, as well as settlement of various tax matters that had a favorable impact on our 2011 three-month period effective income tax rate.

Net Income Attributable to Reliance



                                             September 30,
                                     2012                    2011
                                           % of                    % of      Dollar      Percentage
                                $        Net Sales      $        Net Sales   Change        Change
                                         (dollars in millions)
Net income attributable to
Reliance (three months
ended)                       $  98.1          4.8%   $  84.9          4.0%   $  13.2          15.5%
Net income attributable to
Reliance (nine months
ended)                       $ 323.1          4.9%   $ 275.9          4.5%   $  47.2          17.1%

The increase in net income attributable to Reliance in the three- and nine- month periods ended September 30, 2012 was primarily the result of higher gross profit dollars with relatively lower increases in our operating expenses, and contributions from our 2011 and 2012 acquisitions.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $268.8 million in the nine-month period ended September 30, 2012. As a result of increased demand levels from December 31, 2011, our working capital, primarily accounts receivable and inventories, has increased from year-end levels. However, we were able to fund these increases with our profitable business activities. Our receivables and FIFO inventories increased by $60.6 million and $109.9 million, respectively, from December 31, 2011 levels, offset with increases in our accounts payable and other liabilities of approximately $33.0 million. Our 2011 nine-month period net cash provided by operating activities of $17.3 million was significantly lower from our 2012 levels primarily due to double-digit increases in both demand and pricing for our products that we experienced in 2011 compared to 2010 levels that required much larger investment in our working capital during 2011.

To manage our working capital, we focus on our days sales outstanding and on our inventory turnover rate, as receivables and inventory are the two most significant elements of our working capital. At September 30, 2012, our days sales outstanding rate was approximately 41.4 days compared to 41.6 days at December 31, 2011. Our inventory turn rate (based on dollars) during the nine-month period ended September 30, 2012 was about 4.0 times (or 3.0 months on hand), compared to our 2011 annual rate of 4.4 times (or 2.7 months on hand). Our inventory turns were primarily impacted by our acquisitions of Continental in August 2011 and NSA in April 2012. Excluding the 2011 and 2012 acquisitions, our 2012 inventory turn rate (based on dollars) was 4.3 times (or 2.8 months on hand).


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Investing Activities

Capital expenditures were $137.4 million for the nine-month period ended September 30, 2012 compared to $112.7 million during the same period in 2011. The majority of our 2012 capital expenditures relate to growth initiatives to expand or relocate existing facilities, purchase properties that were previously leased, adding or upgrading equipment, and ongoing maintenance requirements. We also spent $83.0 million on acquisitions in the 2012 nine-month period, net of cash acquired, compared to $306.5 million in the same 2011 period.

Financing Activities

The increase in our working capital, our 2012 capital expenditures and the 2012 acquisitions were largely funded by our cash from operations. We paid dividends to our shareholders of $41.3 million during the nine-month period ended September 30, 2012. In July 2012, our Board of Directors increased our quarterly dividend rate by 67%, and on October 23, 2012, declared the 2012 fourth quarter cash dividend of $0.25 per share. We have increased our dividend 18 times since our IPO in 1994 and have paid regular quarterly dividends to our shareholders for 53 consecutive years.

Liquidity

Our primary sources of liquidity are our internally generated funds from operations and our $1.5 billion revolving credit facility. Our total outstanding debt at September 30, 2012 was $1.37 billion, up from $1.33 billion at December 31, 2011. At September 30, 2012, we had $680.0 million in outstanding borrowings on our $1.5 billion revolving credit facility.

On July 26, 2011, we amended and restated the existing syndicated credit agreement to increase the borrowing limit from $1.1 billion to $1.5 billion, and to extend the maturity date of the credit facility for a five-year term to July 26, 2016. The amended and restated revolving credit facility has 26 banks as lenders. Interest on borrowings from the amended and restated revolving . . .

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