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RS > SEC Filings for RS > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for RELIANCE STEEL & ALUMINUM CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RELIANCE STEEL & ALUMINUM CO


3-May-2013

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, 2012.

2013 Acquisition

On April 12, 2013, we acquired all the outstanding shares of Metals USA Holdings Corp. ("Metals USA") for $20.65 per share in cash, pursuant to which Metals USA has become a wholly owned subsidiary. Metals USA is one of the largest metal service center businesses in the United States and a leading provider of value-added processed carbon steel, stainless steel, aluminum, red metals, manufactured metal components and inventory management services. Metals USA sells its products and services to a diverse customer base and broad range of end markets, including the aerospace, auto, defense, heavy equipment, marine transportation, commercial construction, office furniture manufacturing, energy and oilfield service industries, among several others. This acquisition adds a total of 48 service centers strategically located throughout the United States to our existing operations and complements our existing customer base, product mix and geographic footprint. Metals USA's total assets as of December 31, 2012 and sales for the year then ended were approximately $1.0 billion and $2.0 billion, respectively.

The purchase price for Metals USA was $786.0 million paid in cash at closing for the outstanding shares of Metals USA and the assumption of $466.0 million of debt, representing an enterprise value of approximately $1.25 billion. We funded the transaction and refinanced Metals USA indebtedness with a combination of proceeds from our amended and restated revolving credit facility, a new $500.0 million term loan, and proceeds from our recent $500.0 million senior notes offering (see Note 7).

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 located in Fort Payne, Alabama that will allow Feralloy to better serve the increasing demands of its diverse customer base. GH operates as a wholly owned subsidiary of Feralloy and had net sales of $14.4 million for the three months ended March 31, 2013.

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 headquartered in Houston, Texas with an additional location in Lafayette, Louisiana. Sunbelt had net sales of $10.9 million for the three months ended March 31, 2013.

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"). Airport Metals, based in Melbourne, operates as a stocking distributor of aircraft materials and supplies. Airport Metals had net sales of $0.7 million for the three months ended March 31, 2013.

Effective April, 27, 2012, through our wholly owned subsidiary Precision Strip, Inc. ("PSI"), 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 PSI 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 Vonore location had net sales of $0.7 million for the three months ended March 31, 2013.

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 with additional locations in Anaheim, California; Buford, Georgia; Tulsa, Oklahoma and Mexico City, Mexico. NSA had net sales of $20.2 million for the three months ended March 31, 2013.

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 provides a full range of metal perforating and fabrication services to customers located primarily in the U.S. McKey had net sales of $4.8 million for the three months ended March 31, 2013.


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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012



The following table sets forth certain income statement data for the three-month
periods ended March 31, 2013 and 2012 (dollars are shown in millions and certain
amounts may not calculate due to rounding):



                                                 Three Months Ended March 31,
                                             2013                            2012
                                                     % of                           % of
                                      $           Net Sales           $           Net Sales

Net sales                          $  2,025.3       100.0 %        $ 2,288.3       100.0 %

Cost of sales (exclusive of
depreciation and amortization
expense shown below)                  1,496.5        73.9            1,710.5        74.7

Gross profit (1)                        528.8        26.1              577.8        25.3

Warehouse, delivery, selling,
general and administrative
expenses ("S, G&A")                     357.7        17.7              357.7        15.6

Depreciation expense                     29.8         1.5               25.3         1.1

Amortization expense                     11.3         0.6               10.2         0.4

Operating income                   $    130.0         6.4 %        $   184.6         8.1 %

(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.

Net Sales



                                 Three Months Ended
                                     March 31,                 Dollar      Percentage
                                2013            2012           Change        Change
                                   (in millions)
Net sales                   $    2,025.3     $   2,288.3      $ (263.0 )      (11.5%)
Net sales, same-store       $    1,973.7     $   2,284.5      $ (310.8 )      (13.6%)

                                 Three Months Ended
                                     March 31,                  Tons       Percentage
                                2013            2012           Change        Change
                                   (in thousands)
Tons sold                        1,105.9         1,173.7         (67.8 )       (5.8%)
Tons sold, same-store            1,092.2         1,172.9         (80.7 )       (6.9%)

                                 Three Months Ended
                                     March 31,                 Price       Percentage
                                2013            2012           Change        Change
Average selling price
per ton sold                $      1,832     $     1,960      $   (128 )       (6.5%)
Average selling price
per ton sold,
same-store                  $      1,808     $     1,958      $   (150 )       (7.7%)

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

In general, business activity in most all of our end markets declined in the 2013 three-month period when compared to the same period in 2012 due to increased economic uncertainty, which put pressure on pricing and negatively impacted volumes during the quarter, as well as one less shipping day and an early Easter holiday impacting March 2013. However, our exposure to the auto market, primarily through our toll processing operations, grew in the 2013 period compared to 2012. Aerospace and energy (oil and gas) were both down, but continued to perform well relative to other end markets. Non-residential construction continued to improve slowly and demand in this end market remains well below peak levels.


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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 2012 acquisitions, particularly NSA and Sunbelt which specialize in various alloy steel products, favorably impacted our 2013 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 three-month period ended March 31, 2013 average selling prices declined from the same period in 2012 primarily due to lower mill pricing for most of our products. 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 March 31, 2013 from the same period in 2012 as follows: carbon steel down 9.6%; aluminum down 3.8%; stainless steel down 12.6%; and alloy down 9.3%. As carbon steel sales represent approximately 50% of our sales dollars, changes in carbon steel prices have the most significant impact on changes in our overall average price per ton sold.

Cost of Sales



                                  March 31,
                        2013                    2012
                              % of                    % of       Dollar    Percentage
                    $       Net Sales       $       Net Sales    Change      Change
                            (dollars in millions)
Cost of sales   $ 1,496.5       73.9%   $ 1,710.5     74.7%     $ (214.0 )    (12.5%)

The decrease in cost of sales in the three-month period ended March 31, 2013 compared to the same 2012 period is due to decreased tons sold and lower product costs. See "Net Sales" above for trends in both demand and costs of our products.

Our inventory LIFO valuation 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 $5.0 million in the three-month period ended March 31, 2013 compared to a charge, or expense, of $7.5 million in the same period in 2012. Lower metal costs in 2013 resulted in LIFO income.

Gross Profit



                               March 31,
                      2013                  2012
                           % of                  % of      Dollar    Percentage
                  $      Net Sales      $      Net Sales   Change      Change
                         (dollars in millions)
Gross profit   $ 528.8       26.1%   $ 577.8     25.3%     $ (49.0 )     (8.5%)

The decrease in our gross profit in the three-month period ended March 31, 2013 is due to lower sales. In an environment of falling mill prices we were able to effectively manage our gross profit margins by lowering our selling prices less than our costs declined, resulting in an increase in gross profit margins. See "Net Sales" and "Cost of Sales" for discussion on product pricing trends and our inventory LIFO valuation reserve adjustments, respectively.

Expenses



                                        March 31,
                               2013                   2012
                                    % of                   % of       Dollar    Percentage
                          $       Net Sales      $       Net Sales    Change      Change
                                  (dollars in millions)
S,G&A expense          $  357.7       17.7%   $  357.7       15.6%          -            -
S,G&A expense,
same-store             $  345.0       17.5%   $  356.2       15.6%    $ (11.2 )     (3.1%)
Depreciation &
amortization
expenses               $   41.1        2.1%   $   35.5        1.6%    $   5.6        15.8%

Our three-month period ended March 31, 2013 S,G&A expense remained flat compared to the same period in 2012. The additional expenses provided by our 2012 acquisitions were offset by lower variable costs, including profit-based compensation, as a result of lower levels of demand and profitability. Our three-month period ended March 31, 2013 S,G&A expense as a percent of net sales increased as compared to the same period in 2012 primarily due to the lower metal pricing resulting in lower operating income compared to the same period in 2012.


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

Operating Income



                                   March 31,
                          2013                  2012
                               % of                  % of      Dollar    Percentage
                      $      Net Sales      $      Net Sales   Change      Change
                             (dollars in millions)
Operating income   $ 130.0        6.4%   $ 184.6        8.1%   $ (54.6 )    (29.6%)

The lower gross profit dollars from lower sales levels resulted in lower operating income in the three-month period ended March 31, 2013. The lower operating income margin was primarily due to lower net sales from declines in both pricing and demand.

Other Income



                                  March 31,
                          2013                2012
                              % of                % of      Dollar    Percentage
                      $     Net Sales     $     Net Sales   Change      Change
                            (dollars in millions)
Other income, net   $ 2.9        0.1%   $ 6.5        0.3%   $  (3.6 )    (55.4%)

The changes in other income, net in the three-month period ended March 31, 2013 compared to the same period in 2012 were primarily due to reversals of foreign currency gains from the strengthening of the U.S. dollar in the three-month period ended March 31, 2013 compared to the same period in 2012.

Income Tax Rate

Our effective income tax rates for the three-month period ended March 31, 2013 and 2012 were 29.5% and 33.2%, respectively. Our 2013 three-month period effective income tax rate was favorably impacted from the settlement of certain tax matters.

Net Income Attributable to Reliance



                                        March 31,
                               2013                   2012
                                    % of                   % of       Dollar    Percentage
                          $       Net Sales      $       Net Sales    Change      Change
                                  (dollars in millions)
Net income
attributable to
Reliance               $   83.7        4.1%   $  116.2        5.1%    $ (32.5 )    (28.0%)

The decrease in net income attributable to Reliance in the three-month period ended March 31, 2013 was primarily the result of lower gross profit dollars due to our lower sales levels.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $72.2 million in the three-month period ended March 31, 2013 compared to net cash used in operating activities of $63.2 million in the same period in 2012. The increase was mainly due to lower demand levels which required a lower level of working capital investment during the three-month period ending March 31, 2013 as compared to same period in 2012. When volume or pricing increases, our working capital requirements typically increase. When demand and pricing fall, we typically generate higher levels of cash flow from operating activities as our working capital needs decrease.

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 March 31, 2013, our days sales outstanding rate was approximately 41.8 days compared to 42.1 days at December 31, 2012. Our inventory turn rate (based on dollars) during the three-month period ended March 31, 2013 was about 4.1 times (or 2.9 months on hand), compared to our 2012 annual rate of 4.0 times (or 3.0 months on hand).


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Investing Activities

Net cash used in investing activities of $19.5 million in the three-month period ended March 31, 2013 was mainly comprised of our capital expenditures. Capital expenditures were $26.8 million for the three-month period ended March 31, 2013 compared to $34.6 million during the same period in 2012. The majority of our 2013 capital expenditures relate to growth initiatives to expand or relocate existing facilities, adding or upgrading equipment, and ongoing maintenance requirements.

Financing Activities

Our net cash used in financing activities of $49.7 million in the three-month period ended March 31, 2013 was mainly comprised of net pay downs in our debt and dividend payments to our shareholders offset by proceeds received from the exercise of employee stock options. The net pay downs in our debt of $56.9 million in the three-month period ended March 31, 2013 were largely funded by our cash from operations. We paid dividends to our shareholders of $22.9 million during the three-month period ended March 31, 2013. Proceeds from exercises of stock options were $31.6 million, a significant increase from $4.6 million in the same period in 2012 driven by an increase in our stock price.

On February 19, 2013, our Board of Directors increased our first quarter dividend by 20% from $0.25 per share to $0.30 per share. On April 23, 2013, our Board of Directors declared the 2013 second quarter cash dividend of $0.30 per share. We have increased our dividend 19 times since our IPO in 1994 and have paid regular quarterly dividends to our shareholders for 54 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 March 31, 2013 was $1.15 billion, down from $1.21 billion at December 31, 2012. At March 31, 2013, we had $465.0 million in outstanding borrowings on our $1.5 billion revolving credit facility.

On April 4, 2013, we entered into a syndicated Third Amended and Restated Credit Agreement ("Credit Agreement") with 26 banks as lenders. The Credit Agreement amends and restates our existing $1.5 billion unsecured revolving credit facility and provides for a $500.0 million term loan, expiring April 4, 2018. The Credit Agreement includes an option to increase the revolving credit facility for up to an additional $500.0 million at our request subject to approval of the lenders and certain other conditions. We intend to use the credit facility for working capital and general corporate purposes, including, but not limited to, capital expenditures, dividend payments, repayment of debt, stock repurchases, internal growth initiatives and acquisitions, including our recent acquisition of Metals USA on April 12, 2013.

We also have various other separate revolving credit facilities in place for our operations in Asia and Europe with a combined credit limit of approximately $20.3 million and with combined outstanding balances of $11.3 million and $8.3 million as of March 31, 2013 and December 31, 2012, respectively.

Capital Resources

On November 20, 2006 we entered into an indenture, for the issuance of $600 million of unsecured debt securities. 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.

On April 12, 2013, we entered into an indenture (together with the November 20, 2006 indenture, the "Indentures"), for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, due in 2023. The net proceeds from the issuance were used to partially fund the acquisition of Metals USA.

Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The notes are guaranteed by our named 100%-owned domestic subsidiaries that guarantee our credit agreement. The senior unsecured notes include provisions that require us to make an offer to repurchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in the event of a change in control and a downgrade of our credit rating.

At March 31, 2013, we also had $75.0 million of outstanding senior unsecured notes issued in a private placement of debt. The outstanding senior notes bear interest at a fixed rate of 5.35% and mature in July 2013.


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The $500.0 million term loan due April 4, 2018 will amortize in quarterly installments, with an annual amortization of 5% during the first year, 5% during the second year, 10% during the third year, 10% during the fourth year and 10% during the fifth year, with the balance to be paid at maturity. The term loan may be prepaid without penalty.

Our net debt-to-total capital ratio was 22.4% at March 31, 2013; down from our 2012 year-end rate of 23.8% (net debt-to-total capital is calculated as total debt, net of cash, divided by Reliance shareholders' equity plus total debt, net of cash). On a pro forma basis, giving effect to our acquisition of Metals USA, our leverage ratio was approximately 39%.

As of March 31, 2013, we had $436.9 million of debt obligations coming due before our $1.5 billion amended and restated revolving credit facility expires on April 4, 2018. We expect that we will have adequate cash flow and capacity on our revolving credit facility to fund our debt obligations as well as our working capital, capital expenditure, growth and other needs, and to maintain and potentially increase our dividends. We expect to continue our acquisition and other growth activities in the future and anticipate that we will be able to fund such activities with cash flow from operations and borrowings under our revolving credit facility.

Covenants

Our amended and restated revolving 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 twelve month period ended March 31, 2013 was approximately 10.6 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 and plus or minus any non-operating non-recurring loss or gain, respectively, divided by interest expense). The leverage ratio at March 31, 2013, calculated in accordance with the terms of the credit agreement, was 24.5% 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, 2013 was $1.19 billion compared to the Reliance shareholders' equity balance of $3.65 billion at March 31, 2013.

Additionally, our named 100%-owned domestic subsidiaries, which constitute the substantial majority of our subsidiaries, guarantee the borrowings under the revolving credit facility, the Indentures and the private placement notes. The subsidiary guarantors, together with Reliance, are required collectively to account for at least 80% of our consolidated EBITDA and 80% of consolidated tangible assets. Reliance and the subsidiary guarantors accounted for approximately 91% of our total consolidated EBITDA for the last twelve months and approximately 89% of total consolidated tangible assets as of March 31, 2013.

We were in compliance with all debt covenants at March 31, 2013.

Off-Balance-Sheet Arrangements

Other than the acquisition of Metals USA on April 12, 2013, we had no material changes in commitments for capital expenditures, operating lease obligations or purchase obligations as of March 31, 2013, 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, 2012.

Inflation

Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices.

Seasonality

Some of our customers are in seasonal businesses, especially customers in the construction and energy industries and related businesses. Our geographic, product and customer diversity reduces the impact of seasonal trends on our operating results. However, 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 . . .

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