Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
RS > SEC Filings for RS > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for RELIANCE STEEL & ALUMINUM CO

Form 10-Q for RELIANCE STEEL & ALUMINUM CO


2-May-2014

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, 2013 filed with the SEC.

Overview

Economic activity in 2014 appears to be on an upward trend, with both demand and pricing increasing sequentially for three months in a row during the three months ended March 31, 2014. Our sales increased 26.1% with our tons sold up 38.6% in the three-month period of 2014 compared to the comparable 2013 period mainly due to our acquisition of Metals USA Holdings Corp. ("Metals USA") in April 2013. We saw meaningful improvement in our same-store tons sold in the 2014 first quarter, with our tons increasing 8.4% from the 2013 first quarter, well ahead of the industry data reported by the Metals Service Center Institute, which was up 2.5% during the same period.

In the 2014 first quarter, our sales to the auto industry, mainly through our toll processing operations, along with sales into the aerospace and heavy industries continued to perform well. Non-residential construction showed indications of improving demand, however, overall activity levels in the non-residential construction end market remain well below the peak levels in 2006. We expect the energy (oil and gas) market to modestly improve during the remainder of 2014.

Metals pricing increased somewhat from the 2013 fourth quarter, however, overall pricing was lower than in the 2013 first quarter. Our average selling price was down 8.7%, partially due to product mix. Carbon steel price increases were announced early in the quarter, but then declined somewhat mid-quarter. This created a competitive market, pressuring gross profit margins.

We believe our teams in the field did an excellent job servicing their customers, allowing us to increase market share and maintain our gross profit margins at 25.4%, which is within our historical range of 25%-27%.

Our operating income was negatively impacted by the lower pricing levels as compared to the 2013 first quarter. However, excluding non-recurring litigation charges relating to the antitrust litigation matter and Metals USA transaction related costs, operating income increased 23.5%, in line with our 26.1% increase in net sales. Higher financing costs associated with the borrowings to fund our 2013 acquisitions and a higher effective income tax rate in the 2014 first quarter offset the increase in operating income and contributed to the modest increase in our net income of 4.2%.

As mentioned, we acquired Metals USA in April 2013 which contributed $454.5 million to our 2014 first quarter sales. We also acquired Haskins Steel Co., Inc. ("Haskins Steel") in November 2013, which contributed $8.0 million to our 2014 first quarter sales. We invested $28.9 million in capital expenditures in the three-months ended March 31, 2014, with the majority related to growth activities. We increased our return of cash to shareholders, with a 16.7% increase in our regular quarterly dividend rate compared to the 2013 first quarter.


Table of Contents

As of March 31, 2014, our net debt-to-capital ratio was 33.8%, down from 34.3% as of December 31, 2013 and down from 39.4% upon funding the Metals USA acquisition in April 2013.

We believe that, given continued improvement in demand, especially for non-residential construction, and increased metals pricing levels we have current capacity for meaningfully higher earnings, given our exposure to high-growth industries such as aerospace and energy, our broad and diverse product base, and our wide geographic footprint. We are cautiously optimistic that the U.S. economy will continue its recovery throughout 2014, resulting in better demand and pricing for our products.

We will continue to focus on working capital management, maximizing profitability of our existing businesses and achieving profitable growth through both acquisitions and internal investment. Our operating and growth strategies have helped us achieve industry-leading operating results on a consistent basis and we remain confident in our ability to continue our track record of success going forward.

2013 Acquisitions

On November 1, 2013, we acquired Haskins Steel, located in Spokane, Washington. Founded in 1955, Haskins Steel processes and distributes primarily carbon steel and aluminum products of various shapes and sizes to a diverse customer base in the Pacific Northwest. Their in-house processing capabilities include shearing, sawing, burning and forming. Net sales of Haskins Steel for the three months ended March 31, 2014 were $8.0 million.

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 $78.9 million included the assumption of $43.8 million of indebtedness.

On April 12, 2013, we acquired Metals USA. Metals USA is one of the largest metals 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 added a total of 44 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 for the three months ended March 31, 2014 were $454.5 million.

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013



The following table sets forth certain income statement data for the three-month
periods ended March 31, 2014 and 2013 (dollars are shown in millions and certain
amounts may not calculate due to rounding):



                                               Three Months Ended March 31,
                                             2014                       2013
                                                    % of                       % of
                                        $         Net Sales        $         Net Sales

Net sales                           $  2,553.0        100.0 %  $  2,025.3        100.0 %

Cost of sales (exclusive of
depreciation and amortization
expense shown below)                   1,905.8         74.6       1,496.5         73.9

Gross profit (1)                         647.2         25.4         528.8         26.1

Warehouse, delivery, selling,
general and administrative
expense ("S,G&A")                        441.0         17.3         357.7         17.7

Depreciation expense                      37.8          1.5          29.8          1.5

Amortization expense                      14.1          0.6          11.3          0.6

Operating income                    $    154.3          6.0 %  $    130.0          6.4 %

(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 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.


Table of Contents

Net Sales



                          Three Months Ended
                              March 31,          Dollar    Percentage
                           2014        2013      Change      Change
                            (in millions)
Net sales               $  2,553.0   $ 2,025.3   $ 527.7         26.1 %
Net sales, same-store   $  2,090.4   $ 2,025.3   $  65.1          3.2 %




                         Three Months Ended
                             March 31,          Tons    Percentage
                          2014        2013     Change     Change
                           (in thousands)
Tons sold                 1,532.4    1,105.9    426.5         38.6 %
Tons sold, same-store     1,199.0    1,105.9     93.1          8.4 %




                                       Three Months Ended
                                           March 31,                Price       Percentage
                                      2014           2013          Change         Change
Average selling price per ton
sold                               $     1,673    $     1,832    $      (159 )        (8.7 )%
Average selling price per ton
sold, same-store                   $     1,752    $     1,832    $       (80 )        (4.4 )%

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

Our consolidated sales and tons sold are up significantly in the 2014 period as compared to 2013, mainly due to our acquisition of Metals USA in April of 2013. Metals USA contributed $454.5 million of net sales in the three-month period ended March 31, 2014. Business activity in most all of our end markets was higher in the 2014 three-month period compared to 2013. For the three-month period ended March 31, 2014, same-store tons sold were up 8.4% from the same period in 2013, well above the industry data reported by the Metals Service Center Institute, which was up 2.5% during the same period. One end market that continues to perform well for us in the 2014 three-month period as compared to the comparable 2013 period was auto, primarily through our toll processing businesses in the U.S. and Mexico. Our other major industries that performed reasonably well were aerospace, energy, and heavy industry. Non-residential construction, our largest end market, is showing the beginning signs of a recovery, albeit 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 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.

The most significant challenge in the three-month period ended March 31, 2014 continues to be metals pricing. Though our average selling prices increased sequentially throughout the three-month period ended March 31, 2014, we did experience volatility in pricing for certain of our products during the quarter. Our same-store average selling price continues to be below that observed in the 2013 first-half and 2012 due to still below normal demand levels and lower mill pricing generally attributable to increased imports and increased domestic capacity for many of the products we sell. 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.

In the three-month period ended March 31, 2014 we experienced lower same-store selling prices as compared to the same period in 2013 across all our products, as follows: carbon steel decreased 0.9%; aluminum decreased 3.4%; stainless steel decreased 6.0%; and alloy decreased 3.5%. As carbon steel sales represent approximately 55% of our sales dollars, changes in carbon steel prices have the most significant impact on changes in our overall average price per ton sold.


Table of Contents

Our Metals USA acquisition in April 2013 has lowered our average selling price somewhat as Metals USA's product mix is more heavily weighted toward carbon steel products than our overall company-wide mix and carbon steel products generally have lower prices than the other products we sell. In the 2014 three-month period carbon steel products represented 55% of total sales compared to 50% in the comparable 2013 period.

Cost of Sales



                             Three Months Ended
                                  March 31,
                        2014                    2013
                              % of                    % of      Dollar    Percentage
                    $       Net Sales       $       Net Sales   Change      Change
                            (dollars in millions)
Cost of sales   $ 1,905.8        74.6 % $ 1,496.5        73.9 % $ 409.3         27.4 %

The increase in cost of sales in the three-month period ended March 31, 2014 is mainly due to increases in our tons sold resulting from our 2013 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.

Our LIFO inventory 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 debit, or expense, of $5.0 million in the three-month period ended March 31, 2014 compared to a credit, or income, of $5.0 million in the same period in 2013. Higher metal costs in 2014 as compared to December 31, 2013 levels resulted in LIFO expense.

Gross Profit



                          Three Months Ended
                               March 31,
                      2014                  2013
                           % of                  % of      Dollar    Percentage
                  $      Net Sales      $      Net Sales   Change      Change
                         (dollars in millions)
Gross profit   $ 647.2        25.4 % $ 528.8        26.1 % $ 118.4         22.4 %

The increase in our gross profit in the three-month period ended March 31, 2014 is primarily due to the contribution from our acquisition of Metals USA on April 12, 2013, which was somewhat offset by the impact of the overall decline in our selling prices. See "Net Sales" and "Cost of Sales" for further discussion on product pricing trends and our inventory LIFO valuation reserve adjustments, respectively.

Our gross profit margin was within our historical range of 25% to 27%. The decline in our gross margin was mainly due to a competitive pricing environment given uncertainty due to metal price volatility.

Expenses



                                   Three Months Ended
                                        March 31,
                               2014                   2013
                                    % of                   % of       Dollar     Percentage
                          $       Net Sales      $       Net Sales    Change       Change
                                  (dollars in millions)
S,G&A expense          $  441.0        17.3 % $  357.7        17.7 % $    83.3         23.3 %
S,G&A expense,
same-store             $  365.2        17.5 % $  354.6        17.5 % $    10.6          3.0 %
Depreciation &
amortization expense   $   51.9         2.1 % $   41.1         2.1 % $    10.8         26.3 %

Our expenses increased mainly due to the additional expenses of our 2013 acquisitions and legal costs and accruals associated with the antitrust litigation matter. Excluding the $10.3 million of charges related to the antitrust litigation matter, our same-store S,G&A expense in the 2014 three-month period was flat with the 2013 comparable period and our expense as a percent of sales decreased to 16.9%. For further discussion of our pending litigation matter, see Note 9 of the Notes to Unaudited Consolidated Financial Statements.


Table of Contents

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

Operating Income



                              Three Months Ended
                                   March 31,
                          2014                  2013
                               % of                  % of      Dollar    Percentage
                      $      Net Sales      $      Net Sales   Change      Change
                             (dollars in millions)
Operating income   $ 154.3         6.0 % $ 130.0         6.4 % $  24.3         18.7 %

Our operating income was higher due primarily to the contributions of our 2013 acquisitions. Our operating margin declined in 2014 mainly due to declines in our selling prices along with non-recurring legal costs and accruals relating to a litigation matter.

Other Income (Expense)



                                Three Months Ended
                                    March 31,
                           2014                   2013
                                % of                   % of       Dollar    Percentage
                       $      Net Sales       $      Net Sales    Change      Change
                              (dollars in millions)
Interest            $ (20.2 )      (0.8 )% $ (13.1 )      (0.6 )% $  (7.1 )       54.2 %
Other income, net   $     -           - %  $   2.9         0.1 %  $  (2.9 )     (100.0 )%

In the three-month period ended March 31, 2014 interest expense increased primarily due to the new $500.0 million term loan and proceeds from our $500.0 million senior notes offering to fund our $1.25 billion acquisition of Metals USA in April 2013. See discussion in the "Liquidity and Capital Resources" section of our "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The change in other income, net was primarily due to lower income from company-owned life insurance policies.

Income Tax Rate

Our effective income tax rates for the three-month periods ended March 31, 2014 and 2013 were 34.5% and 29.5%, respectively. Permanent items that lowered our effective income tax rates from the federal statutory rate were not materially different in amounts during both years and relate mainly to company-owned life insurance policies, domestic production activities deductions and foreign income levels that are taxed at rates lower than the U.S. statutory rate of 35%. Additionally, our 2013 three-month period effective income tax rate was favorably impacted from the settlement of certain tax matters.

Net Income



                                        Three Months Ended
                                             March 31,
                                   2014                     2013
                                         % of                     % of        Dollar      Percentage
                              $        Net Sales       $        Net Sales     Change        Change
                                       (dollars in millions)
Net income attributable
to Reliance               $     87.2         3.4 % $     83.7         4.1 % $       3.5          4.2 %

The increase in our net income was primarily the result of higher operating income offset by higher interest costs and a higher effective income tax rate. The decline in our net income as a percentage of net sales is due to declines in our selling prices along with non-recurring legal costs and accruals.


Table of Contents

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $68.8 million in the three-month period ended March 31, 2014 compared with $72.2 million provided in the same period in 2013, reflecting our consistent profitability in both periods. 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, 2014, our days sales outstanding rate was approximately 41.6 days compared to 41.3 days at December 31, 2013. Our inventory turn rate (based on dollars) during the three-month period ended March 31, 2014 was about 4.4 times (or 2.7 months on hand), compared to our 2013 annual rate of 4.2 times (or 2.9 months on hand).

Investing Activities

Net cash used in investing activities of $38.0 million in the three-month period ended March 31, 2014 was mainly comprised of our capital expenditures. Capital expenditures were $28.9 million for the three-month period ended March 31, 2014 compared to $26.8 million during the same period in 2013. The majority of our 2014 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 $0.2 million in the three-month period ended March 31, 2014 was mainly comprised of net debt borrowings and proceeds received from the exercise of employee stock options offset by dividend payments to our shareholders. Net debt borrowings in the three-month period ended March 31, 2014 were $18.6 million compared to repayments of $56.9 million in the same period in 2013. We paid dividends to our shareholders of $27.1 million during the three-month period ended March 31, 2014, an increase of $4.2 million from the same period in 2013 due to increases in our regular quarterly dividend rate. Proceeds from exercises of stock options were $8.4 million, a significant decrease from $31.6 million in the same period in 2013.

On February 18, 2014, our Board of Directors increased our regular quarterly dividend to $0.35 per share of common stock, an increase of 6% from $0.33 per share. On April 22, 2014, the Board declared the 2014 second quarter cash dividend of $0.35 per share. We have increased our dividend 21 times since our IPO in 1994 and have paid regular quarterly dividends to our shareholders for 55 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, 2014 was $2.13 billion, up slightly from $2.11 billion at December 31, 2013. At March 31, 2014, we had $505.0 million in outstanding borrowings on our $1.5 billion revolving credit facility. As of March 31, 2014, our net debt-to-capital ratio was 33.8%, down from 34.3% as of December 31, 2013.

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 amended and restated our existing $1.5 billion unsecured revolving credit facility and provided for a $500.0 million term loan and an option to increase the revolving credit facility for up to $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.

We also have other revolving credit facilities in place for our operations in Asia and Europe with a combined credit limit of approximately $21.6 million and with combined outstanding balances of $9.8 million and $9.5 million as of March 31, 2014 and December 31, 2013, respectively.

Capital Resources

On November 20, 2006 we entered into an indenture (the "2006 Indenture"), for the issuance of $600.0 million of unsecured debt securities. The total debt issued was comprised of two tranches, (a) $350.0 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) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036.


Table of Contents

On April 12, 2013, we entered into an indenture (the "2013 Indenture" and, together with the 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, maturing on April 15, 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 revolving credit facility. The senior unsecured notes include provisions that require us to make an offer to . . .

  Add RS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for RS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.