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RS > SEC Filings for RS > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for RELIANCE STEEL & ALUMINUM CO

Form 10-Q for RELIANCE STEEL & ALUMINUM CO


2-Aug-2013

Quarterly Report


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

This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include discussions of our business strategies and our expectations concerning future operations, margins, profitability, liquidity and capital resources. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" and "continue," the negative of these terms, and similar expressions. All statements contained in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management's estimates, projections and assumptions as of the date of such statements.

Forward-looking statements involve known and unknown risks and uncertainties and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements as a result of various important factors, including, but not limited to, those disclosed in this report and in other reports we have filed with the Securities and Exchange Commission (the "SEC"). As a result, these statements speak only as of the date that they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Important risks and uncertainties about our business can be found in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC.

2013 Acquisitions

On April 30, 2013, we acquired Travel Main Holdings, LLC ("Travel Main"), a real estate holding company with a portfolio of 18 real estate properties, all of which are leased by certain of our subsidiaries. The transaction value of $75.6 million included the assumption of $43.8 million of net indebtedness. The cash portion of the purchase price was funded with borrowings on our revolving credit facility.

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 aluminum, brass, copper, carbon steel, stainless steel, 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. Net sales of Metals USA during the period from April 13, 2013 through June 30, 2013 were $396.5 million.

The purchase price for Metals USA was $766.8 million paid in cash at closing for the outstanding shares of Metals USA and the assumption of $486.1 million of debt, representing a total transaction value of approximately $1.25 billion. We funded the transaction and refinanced all but $12.3 million of 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 - Debt" to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. We incurred approximately $11.4 million in transaction related costs which are included in warehouse, delivery, selling, general and administrative expenses.

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 $30.6 million for the six months ended June 30, 2013.


Table of Contents

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 $22.3 million for the six months ended June 30, 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 $1.6 million for the six months ended June 30, 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 $1.4 million for the six months ended June 30, 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 $41.6 million for the six months ended June 30, 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 $10.0 million for the six months ended June 30, 2013.

Three Months and Six Months Ended June 30, 2013 Compared to Three Months and Six
Months Ended June 30, 2012



The following table sets forth certain income statement data for the three-month
and six-month periods ended June 30, 2013 and 2012 (dollars are shown in
millions and certain amounts may not calculate due to rounding):



                                     Three Months Ended June 30,                            Six Months Ended June 30,
                                   2013                       2012                       2013                       2012
                                          % of                       % of                       % of                       % of
                              $        Net Sales         $        Net Sales         $        Net Sales         $        Net Sales
Net sales                $ 2,448.3        100.0 %   $ 2,209.7        100.0 %   $ 4,473.6        100.0 %   $ 4,498.0        100.0 %

Cost of sales
(exclusive of
depreciation and
amortization expense
shown below)               1,826.7         74.6       1,640.3         74.2       3,323.2         74.3       3,350.8         74.5

Gross profit (1)             621.6         25.4         569.4         25.8       1,150.4         25.7       1,147.2         25.5

Warehouse, delivery,
selling, general and
administrative expense
("S,G&A")                    426.0         17.4         346.7         15.7         783.7         17.5         704.4         15.7

Depreciation expense          35.0          1.4          25.8          1.2          64.8          1.4          51.1          1.1

Amortization expense          15.1          0.6          10.7          0.5          26.4          0.6          20.9          0.5

Operating income         $   145.5          5.9 %   $   186.2          8.4 %   $   275.5          6.2 %   $   370.8          8.2 %

(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



                                           June 30,                  Dollar                 Percentage
                                      2013          2012             Change                          Change
                                         (in millions)
Net sales (three months ended)      $ 2,448.3     $ 2,209.7           $   238.6                      10.8 %
Net sales (six months ended)        $ 4,473.6     $ 4,498.0           $   (24.4 )                    (0.5 %)
Net sales, same-store (three
months ended)                       $ 1,996.0     $ 2,179.3           $  (183.3 )                    (8.4 %)
Net sales, same-store (six
months ended)                       $ 3,969.7     $ 4,463.8           $  (494.1 )                   (11.1 %)

                                           June 30,                  Tons                    Percentage
                                      2013          2012            Change                      Change
                                        (in thousands)
Tons sold (three months ended)        1,423.5       1,146.2               277.3                      24.2 %
Tons sold (six months ended)          2,529.4       2,319.9               209.5                       9.0 %
Tons sold, same-store (three
months ended)                         1,132.9       1,143.1               (10.2 )                    (0.9 %)
Tons sold, same-store (six
months ended)                         2,225.1       2,316.0               (90.9 )                    (3.9 %)

                                           June 30,                   Price                 Percentage
                                      2013          2012             Change                           Change
Average selling price per ton
sold (three months ended)           $   1,718     $   1,929           $    (211 )                   (10.9 %)
Average selling price per ton
sold (six months ended)             $   1,768     $   1,945           $    (177 )                    (9.1 %)
Average selling price per ton
sold, same-store (three months
ended)                              $   1,760     $   1,908           $    (148 )                    (7.8 %)
Average selling price per ton
sold, same-store (six months
ended)                              $   1,783     $   1,934           $    (151 )                    (7.8 %)

Tons sold and average selling price per ton sold amounts exclude our toll processing sales. Same-store amounts exclude the results of our 2013 and 2012 acquisitions.

In general, business activity in most all of our end markets declined slightly in the 2013 three and six-month periods when compared to the same periods in 2012, which put pressure on pricing and negatively impacted volumes during the periods, as well as one less shipping day. However, our exposure to the auto market, primarily through our toll processing operations, grew in the 2013 periods compared to 2012. Aerospace and energy (oil and gas) were both down, but continued to perform well relative to other end markets. Manufactured goods and heavy equipment decreased during the periods primarily due to decreased demand coming from the mining sector; however demand from agriculture equipment manufacturers increased. Non-residential construction continued to improve slowly and demand in this end market remains well below peak levels.

Our three-month and six-month periods ended June 30, 2013 average selling prices declined from the same periods in 2012 primarily due to lower mill pricing for most of our products. Our major commodity same-store selling prices changed during the three-month period ended June 30, 2013 from the same period in 2012 as follows: carbon steel down 9.3%; aluminum down 3.8%; stainless steel down 9.9%; and alloy down 7.8%. For the 2013 six-month period, our same-store average selling prices changed from the same period in 2012 as follows: carbon steel down 9.5%; aluminum down 3.8%; stainless steel down 11.3%; and alloy down 8.6%. 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. 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 2013 acquisition of Metals USA decreased our average selling prices due to their mix of products, which are primarily carbon steel products that generally have lower prices than the Company average.

Cost of Sales



                                            June 30,
                                  2013                     2012
                                         % of                    % of         Dollar          Percentage
                              $        Net Sales       $       Net Sales      Change              Change
                                      (dollars in millions)
Cost of sales (three
months ended)            $ 1,826.7         74.6%   $ 1,640.3       74.2%       $  186.4             11.4 %
Cost of sales (six
months ended)            $ 3,323.2         74.3%   $ 3,350.8       74.5%       $  (27.6 )           (0.8 %)

The increase in cost of sales in the three-month period ended June 30, 2013 and the slight decrease in the six-month period compared to the same 2012 periods are mainly due to increases in our tons sold resulting from our 2013 and 2012 acquisitions offset by lower mill pricing for most of our products. See "Net Sales" above for trends in both demand and costs of our products.


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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 June 30, 2013 compared to a credit, or income, of $7.5 million in the same period in 2012. Our LIFO reserve adjustment resulted in a credit, or income, of $10.0 million in the six-month period ended June 30, 2013 compared to no charge or credit in the same period in 2012. Lower metal costs in 2013 as compared to December 31, 2012 levels resulted in LIFO income.

Gross Profit



                                             June 30,
                                 2013                      2012
                                       % of                      % of          Dollar      Percentage
                             $       Net Sales      $          Net Sales       Change         Change
                                      (dollars in millions)
Gross profit (three
months ended)            $   621.6       25.4%   $    569.4         25.8%        $ 52.2            9.2%
Gross profit (six
months ended)            $ 1,150.4       25.7%   $  1,147.2         25.5%        $  3.2            0.3%

The increase in our gross profit in the three-month period ended June 30, 2013 is primarily due to higher sales from our acquisition of Metals USA on April 12, 2013. See "Net Sales" and "Cost of Sales" for discussion on product pricing trends and our inventory LIFO valuation reserve adjustments, respectively.

Expenses



                                           June 30,
                                2013                    2012
                                     % of                     % of         Dollar        Percentage
                            $      Net Sales        $       Net Sales      Change           Change
                                    (dollars in millions)
S,G&A expense (three
months ended)            $ 426.0       17.4%    $ 346.7         15.7%   $        79.3           22.9%
S,G&A expense (six
months ended)            $ 783.7       17.5%    $ 704.4         15.7%   $        79.3           11.3%
S,G&A expense,
same-store (three
months ended)            $ 341.0       17.1%    $ 339.5         15.6%   $         1.5            0.4%
S,G&A expense,
same-store (six months
ended)                   $ 683.9       17.2%    $ 695.7         15.6%   $      (11.8)          (1.7%)
Depreciation &
amortization expenses
(three months ended)     $  50.1        2.0%    $  36.5          1.7%   $        13.6           37.3%
Depreciation &
amortization expenses
(six months ended)       $  91.2        2.0%    $  72.0          1.6%   $        19.2           26.7%

Same-store amounts exclude the results of our 2013 and 2012 acquisitions.

Our three and six-month periods ended June 30, 2013 expenses increased due to the additional expenses of our 2013 and 2012 acquisitions. The additional expenses provided by our 2013 and 2012 acquisitions were offset by lower variable costs, including profit-based compensation, as a result of lower levels of demand and profitability. Our three and six-month periods ended June 30, 2013 S,G&A expense as a percentage of net sales increased as compared to the same period in 2012 primarily due to lower average selling prices in the 2013 three and six-month periods compared to the same periods in 2012.

Our 2013 SG&A expenses include non-recurring charges of $9.5 million in the 2013 second quarter and $12.6 million in the six-month period related to the MUSA acquisition as well as the consolidation of an existing facility into another Reliance facility.

The increase in depreciation and amortization expense was mainly due to our 2013 and 2012 acquisitions and depreciation expense from our recent capital expenditures.

Operating Income



                                          June 30,
                                 2013                  2012
                                      % of                  % of         Dollar      Percentage
                            $       Net Sales      $      Net Sales      Change         Change
                                   (dollars in millions)
Operating income
(three months ended)     $ 145.5         5.9%   $ 186.2        8.4%      $ (40.7)         (21.9%)
Operating income (six
months ended)            $ 275.5         6.2%   $ 370.8        8.2%      $ (95.3)         (25.7%)


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During the three and six-month periods ended June 30, 2013, we generated lower operating income due to higher S,G&A expenses partially offset by the higher gross profit dollars contributed by our 2013 and 2012 acquisitions. The lower operating income margins were primarily due to higher S,G&A expenses as a percentage of net sales due to declines in metal pricing.

Other Income (Expense)



                                              June 30,
                                  2013                       2012
                                        % of                        % of          Dollar       Percentage
                             $        Net Sales         $         Net Sales       Change          Change
                                        (dollars in millions)
Interest (three months
ended)                   $  (22.1)      (0.9%)     $  (15.0)        (0.7%)     $      (7.1)           47.3%
Interest (six months
ended)                   $  (35.2)      (0.8%)     $  (29.5)        (0.7%)     $      (5.7)           19.3%
Other expense, net
(three months ended)     $   (0.6)        0.0%     $   (3.5)        (0.2%)     $        2.9         (82.9%)
Other income, net (six
months ended)            $     2.3        0.1%     $     3.0          0.1%     $      (0.7)         (23.3%)

The three and six-month periods ended June 30, 2013 interest expense increased due to the increased borrowings on our revolving credit facility, the new $500.0 million term loan, and proceeds from our $500.0 million senior notes offering to fund our 2013 acquisitions.

The change in other expense, net in the three-month period ended June 30, 2013 compared to the same period in 2012 was primarily due to lower foreign currency losses, as our intercompany balances with our Canadian operations decreased significantly, and higher returns on life insurance policies. The change in other income, net in the six-month period ended June 30, 2013 was due to higher foreign currency losses from the strengthening of the U.S dollar during the three-month period ended March 31, 2013.

Income Tax Rate

Our effective income tax rates for the three-month periods ended June 30, 2013 and 2012 were 33.3% and 34.3%, respectively. Our effective income tax rates for the six-month periods ended June 30, 2013 and 2012 were 31.4% and 33.7%, 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 related mainly to company-owned life insurance policies, domestic production activities deductions and foreign income levels that are taxed at lower rates. Our 2013 six-month period effective income tax rate was favorably impacted by the settlement of certain tax matters.

Net Income Attributable to Reliance



                                            June 30,
                                  2013                     2012
                                       % of                     % of         Dollar         Percentage
                            $        Net Sales       $        Net Sales      Change             Change
                                      (dollars in millions)
Net income
attributable to
Reliance (three months
ended)                   $   81.0       3.3 %     $  108.8       4.9 %     $    (27.8 )          (25.6 %)
Net income
attributable to
Reliance (six months
ended)                   $  164.7       3.7 %     $  225.0       5.0 %     $    (60.3 )          (26.8 %)

Our net income in the three and six-month periods ended June 30, 2013 declined primarily due to higher S,G&A expenses offset by contributions from our 2013 and 2012 acquisitions. The declines in our net income as a percentage of net sales in the 2013 periods when compared to the same periods in 2012 are due to declines in our selling prices.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $283.9 million in the six-month period ended June 30, 2013 compared to net cash provided by operating activities of $21.2 million in the same period in 2012. The increase of $262.7 million is primarily due to lower inventory levels in an effort to improve our inventory turnover rate. 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 June 30, 2013, our days sales outstanding rate was approximately 41.7 days compared to 42.1 days at December 31, 2012. Our inventory turn rate (based on dollars) during the six-month period ended June 30, 2013 was about 4.2 times (or 2.9 months on hand), compared to our 2012 annual rate of 4.0 times (or 3.0 months on hand).


Table of Contents

Investing Activities

Net cash used in investing activities of $860.5 million in the six-month period ended June 30, 2013 was mainly comprised of our acquisitions and capital expenditures. We spent $794.7 million on acquisitions, net of cash acquired in the six-months ended June 30, 2013 compared to $82.3 million during the same period in 2012. Capital expenditures were $74.3 million for the six-month period ended June 30, 2013 compared to $86.8 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 provided by financing activities of $581.4 million in the six-month period ended June 30, 2013 was mainly comprised of net debt borrowings and dividend payments to our shareholders offset by proceeds received from the exercise of employee stock options. The net debt borrowings of $597.0 million in the six-month period ended June 30, 2013 were primarily used to fund our acquisitions in 2013. We paid dividends to our shareholders of $46.0 million during the six-month period ended June 30, 2013. Proceeds from exercises of stock options were $42.4 million, a significant increase from $9.7 million in the same period in 2012 driven by an increase in our stock price.

On July 23, 2013, our Board of Directors declared the 2013 third quarter cash dividend of $0.33 per share, an increase of 10% compared to the 2013 second quarter cash dividend. We have increased our dividend 20 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 . . .

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