RELIANCE STEEL & ALUMINUM CO - Annual Report: 2009 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ________
Commission file number: 001-13122
RELIANCE STEEL & ALUMINUM CO.
(Exact name of registrant as specified in its charter)
| California (State or other jurisdiction of incorporation or organization) |
95-1142616 (I.R.S. Employer Identification No.) |
350 South Grand Avenue, Suite 5100
Los Angeles, California 90071
(213) 687-7700
(Address of principal executive offices and telephone number)
Los Angeles, California 90071
(213) 687-7700
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
|
| Common Stock | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Small reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant, based
on the closing price on the New York Stock Exchange on June 30, 2009 was approximately
$2,420,000,000. As of January 31, 2010, 73,810,882 shares of the registrant’s common stock, no par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting
of Shareholders to be held May 19, 2010 (the “Proxy Statement”) are
incorporated by reference into Part III of this report.
INDEX
i
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
SECURITIES LITIGATION REFORM ACT OF 1995
Unless otherwise indicated or required by the context, as used in this Annual Report on Form
10-K, the terms “Company”, “we,” “our,” and “us” refer to Reliance Steel & Aluminum Co. and all of
its subsidiaries that are consolidated in conformity with U.S. generally accepted accounting
principles. This Annual Report on Form 10-K and the documents incorporated by reference contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. 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,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,”
“predicts,” “potential” and similar expressions. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance or achievements to differ
materially from those in the future that are implied by these forward-looking statements. These
risks and other factors include those described under “Risk Factors” and elsewhere in this Annual
Report on Form 10-K and the documents incorporated by reference. These factors, among others,
could cause our actual results and performance to differ materially from the results and
performance projected in, or implied by, the forward-looking statements. As you read and consider
this Annual Report and the documents incorporated by reference, you should understand that the
forward-looking statements are not guarantees of performance or results.
All future written and oral forward-looking statements attributable to us or to any person
acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. New risks and uncertainties arise from time to time, and
we cannot predict those events or how they may affect us. We assume no obligation to update any
forward-looking statements after the date of this Annual Report as a result of new information,
future events or developments, except as required by the federal securities laws.
Forward-looking statements involve known and unknown risks and uncertainties. Various
factors, such as the factors listed below and further discussed in detail in “Risk Factors” may
cause our actual results, performance, or achievements to be materially different from those
expressed or implied by any forward-looking statements. Among the factors that could cause our
results to differ are the following:
| • | Our future operating results depend on a number of factors beyond our control, such as the prices for and the availability of metals, which could cause our results to fluctuate significantly over time. During periods of low customer demand it could be more difficult for us to pass through price increases to our customers, which could reduce our gross profit and net income. A significant or rapid increase or decrease in costs from current levels could also have a severe negative impact on our gross profit. | ||
| • | We service industries that are highly cyclical, and downturns in our customers’ industries could reduce our revenue and profitability. | ||
| • | The success of our business is affected by general economic conditions and, accordingly, our business was adversely impacted by the recent economic recession. In the 2008 fourth quarter the effects of the depressed economy impacted our industry in a very significant and rapid manner from both demand and pricing perspectives, which continued throughout 2009. Although pricing and demand stabilized somewhat during the latter part of 2009 and so far in 2010, demand for our products continues to be at low levels. We do not know if, or when, demand levels will return to pre-recession levels. Lower demand levels could cause our financial condition to worsen. | ||
| • | We operate in a very competitive industry and increased competition could reduce our gross profit margins and net income. The inventory destocking that occurred in our industry beginning in late 2008 and continuing through 2009, as a result of price reductions from our suppliers and significant decreases in demand from our customers, significantly increased competitive pressures and negatively impacted our gross profit margins. | ||
| • | Global economic factors may cause increased imports of metal products to the U.S., which may cause the cost of the metals we purchase to decline and could also cause our selling prices and gross profits to decline. | ||
| • | Producers of carbon steel products have reduced production capacity to react to end demand levels. If the producers increase production levels without offsetting increases in end demand, metal costs could decline, which may cause our selling prices and gross profits to decline. | ||
| • | As a decentralized business, we depend on both senior management and our operating employees; if we are unable to attract and retain well-qualified individuals, our results of operations may decline. |
ii
| • | Foreign currency exchange rates could change, which could affect the price we pay for certain metals and the results of our foreign operations, which have grown as a percentage of our total operations to approximately 4% of net sales in 2009 (based on where sales originated from). | ||
| • | The interest rates on our $1.1 billion revolving credit facility are variable. Although our outstanding borrowings on the $1.1 billion revolving credit facility were only $115.0 million at December 31, 2009, the impact of interest rate changes on our financial results could increase if we increase our borrowings on our $1.1 billion revolving credit facility to finance future acquisitions or increases in working capital. | ||
| • | The recent financial crisis has reduced credit availability for certain of our customers. The amount of customer receivables that we wrote off as uncollectible in 2009 increased significantly compared to prior years. If our customers are unable to obtain the credit necessary to fund their operations and their purchases from us, our financial results could be negatively affected. If credit is limited, our ability to obtain funds for future growth activities may also be limited. | ||
| • | We may not be able to consummate future acquisitions, and those acquisitions that we do complete may be difficult to integrate into our business, or may fail to successfully adopt our operating strategies. | ||
| • | Our acquisitions might fail to perform as we anticipate or there could be significant negative events in our industry or the general economy that fundamentally alter our business model and outlook. This could result in an impairment charge to write off some or all of the goodwill and/or other intangible assets for that entity. Acquisitions may also result in our becoming responsible for unforeseen liabilities that may adversely affect our financial condition and liquidity. If our acquisitions do not perform as anticipated, our operating results also may be adversely affected. | ||
| • | Various environmental and other governmental regulations may require us to expend significant capital and incur substantial costs or may impact the customers we serve, which may have a negative impact on our financial results. | ||
| • | We may discover internal control deficiencies in our decentralized operations or in an acquisition that must be reported in our SEC filings, which may result in a negative impact on the market price of our common stock or the ratings of our debt. | ||
| • | If existing shareholders with substantial holdings of our common stock sell their shares, the market price of our common stock could decline. | ||
| • | Principal shareholders who own a significant number of our shares may have interests that conflict with yours. | ||
| • | We have implemented a staggered or classified Board that may impact your rights as a shareholder. | ||
| • | We may pursue growth opportunities that require us to increase our leverage ratios. This may cause our stock price to decline. | ||
| • | The volatility of our stock price has increased significantly. This volatility may continue in the future and may increase from current levels. |
The foregoing factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business. Although we believe the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future performance
or results. We are not obligated to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. You should consider these risks when
reading any forward-looking statements and review carefully the section captioned “Risk Factors” in
Item 1A. of this Annual Report on Form 10-K for a more complete discussion of the risks of an
investment in the Company’s securities.
This Annual Report on Form 10-K includes registered trademarks, trade names and service marks
of the Company and its subsidiaries.
iii
PART I
Item 1. Business
We are the largest metals service center company in North America (U.S. and Canada). Our
network of metals service centers operates more than 200 locations in 38 states, Belgium, Canada,
China, Mexico, Singapore, South Korea and the United Kingdom. Through this network, we provide
metals processing services and distribute a full line of more than 100,000 metal products,
including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty
steel products, to more than 125,000 customers in a broad range of industries. Many of our metals
service centers process and distribute only specialty metals. In addition to being diversified by
products and customers, we are geographically diversified. We deliver products from facilities
located across the United States and Canada, and have a growing international presence to support
the globalization of our customers.
Our primary business strategy is to enhance our operating results through strategic
acquisitions, expansion of our existing operations and improved operating performance at our
locations. Because of the difficult economic conditions in 2009, we placed acquisitions on hold
and focused on improving our liquidity position by reducing debt mainly through lowering our
working capital. We were successful in these efforts and generated approximately $943.0 million in
cash flow from operating activities and used $831.2 million of the cash flow to pay down debt. Our
total long-term debt was $939.6 million at December 31, 2009 (with a net debt-to-total capital
ratio of 25.6%), down from $1.77 billion at December 31, 2008 (with a net debt-to-total capital
ratio of 41.4%). Despite experiencing one of the worst years in the metals service center industry
with respect to both unparalleled demand and price declines, Reliance was profitable in 2009. We
believe our focused growth strategy of diversifying our products, customers and geographic
locations makes us less vulnerable to regional or industry specific economic volatility and
somewhat lessened the negative impact of the recent recession.
Industry Overview
Metals service centers acquire products from primary metals producers and then process carbon
steel, aluminum, stainless steel and other metals to meet customer specifications, using techniques
such as blanking, leveling (or cutting-to-length), sawing, shape cutting, shearing and slitting.
These processing services save our customers time, labor, and expense and reduce their overall
manufacturing costs. Specialized equipment used to process the metals requires high-volume
production to be cost effective. Many manufacturers are not able or willing to invest in the
necessary technology, equipment, and inventory to process the metals for their own manufacturing
operations. Accordingly, industry dynamics have created a niche in the market. Metals service
centers purchase, process, and deliver metals to end-users in a more efficient and cost-effective
manner than the end-user could achieve by dealing directly with the primary producer or with an
intermediate steel processor. Service centers comprise the largest single customer group for North
American mills, buying and reselling more than 43% of all the carbon, alloy, stainless and
specialty steels, aluminum, copper, brass and bronze, and superalloys produced in the U.S. and
Canada last year (Purchasing magazine, April 2009).
In April 2009, the magazine Purchasing also reported that the North American (U.S. and Canada)
metals distribution industry was estimated to have generated net sales of $153 billion in 2008 (the
latest year for which such information is available), or about 7% more than the $143 billion
generated in 2007.
The metals service center industry is highly fragmented and intensely competitive within
localized areas or regions. Many of our competitors operate single stand-alone service centers.
According to Purchasing, the number of intermediate steel processors and metal center facilities in
North America has decreased from approximately 7,000 locations in 1980 to approximately 3,300
locations operated by more than 1,200 companies in 2008. This consolidation trend continues to
create opportunities for us to expand by making acquisitions.
Metals service centers are generally less susceptible to market cycles than producers of the
metals, because service centers are usually able to pass on all or a portion of increases in metal
costs to their customers, unless they are selling to their customers on a contractual basis. In
recent years, consolidation at the carbon steel mill level has led to capacity rationalization and
elevated the pricing levels for these products. We believe that service centers, like Reliance,
with the most rapid inventory turnover are generally the least vulnerable to changing metals
prices.
Customers purchase from service centers to obtain value-added metals processing, readily
available inventory, reliable and timely delivery, flexible minimum order size, and quality
control. Many customers deal exclusively with service centers because the quantities of metal
products that they purchase are smaller than the minimum orders specified by mills or because those
customers require intermittent deliveries over long or irregular periods. Metals service centers
respond to a niche market created because of the focus of the capital goods and related industries
on just-in-time inventory management and materials management
outsourcing, and because integrated mills have reduced in-house direct sales efforts to small
sporadic purchasers to enhance their production efficiency.
1
History of Reliance
Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939,
and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten
years, we had become a full-line distributor of steel and aluminum, operating a single metals
service center in Los Angeles. In the early 1950’s, we automated our materials handling operations
and began to provide processing services to meet our customers’ requirements. In the 1960’s, we
began to acquire other companies to establish additional service centers, expanding into other
geographic areas.
In the mid-1970’s, we began to establish specialty metals centers stocked with inventories of
selected metals such as aluminum, stainless steel, brass, and copper, and equipped with automated
materials handling and precision cutting equipment. We have continued to expand our network, with
a focus on servicing our customers as opposed to merely distributing metal. In the mid-1990’s we
began to expand nationally and focused on acquiring well-run, profitable service center companies.
We have continued that strategy and have become the largest North American (U.S. and Canada) metals
service center company based on revenues, with over 200 locations and net 2009 sales of $5.32
billion. We have not diversified outside of our core business and we strive to consistently
perform as one of the best in our industry. We currently operate metals service centers under the
following trade names:
| No. of | ||||
| Trade Name | Locations | Primary Products Processed & Distributed | ||
Reliance Divisions |
||||
Affiliated Metals |
1 | Plate and flat-rolled aluminum and stainless steel | ||
Bralco Metals |
6 | Aluminum, brass, copper and stainless steel | ||
Central Plains Steel Co. |
1 | Carbon steel | ||
Lusk Metals |
1 | Precision cut aluminum plate and aluminum sheet and extrusions | ||
MetalCenter |
1 | Flat-rolled aluminum and stainless steel | ||
Olympic Metals |
1 | Aluminum, brass, copper and stainless steel | ||
Reliance Metalcenter |
9 | Variety of carbon steel and non-ferrous metal products | ||
Reliance Steel Company |
2 | Carbon steel flat-rolled and plate | ||
Tube Service Co. |
6 | Specialty tubing | ||
Allegheny Steel Distributors, Inc. |
1 | Carbon steel | ||
Aluminum and Stainless, Inc. |
2 | Aluminum sheet, plate and bar | ||
American Metals Corporation |
||||
American Metals |
3 | Carbon steel bar, flat-rolled, plate, structural and tubing | ||
American Steel |
2 | Carbon steel bar, flat-rolled, plate, structural and tubing | ||
AMI Metals, Inc. |
||||
AMI Metals |
6 | Heat-treated aluminum sheet and plate | ||
AMI Metals Europe S.P.R.L. |
1 | Heat-treated aluminum sheet and plate | ||
CCC Steel, Inc. |
||||
CCC Steel |
1 | Carbon steel bar, plate, structural and tubing | ||
IMS Steel |
1 | Carbon steel bar, plate, structural and tubing | ||
Chapel Steel Corp. |
5 | Carbon steel plate | ||
Chatham Steel Corporation |
5 | Carbon and stainless steel | ||
Clayton Metals, Inc. |
3 | Aluminum and stainless steel flat-rolled products and custom extrusions | ||
Crest Steel Corporation |
2 | Carbon steel flat-rolled, plate, bar and structural | ||
Delta Steel, Inc. |
||||
Delta Steel |
5 | Carbon steel bar, flat-rolled, plate, structural and tubing | ||
Smith Pipe & Steel Company |
1 | Carbon steel bar, flat-rolled, plate, structural and tubing | ||
Durrett Sheppard Steel Co., Inc. |
1 | Carbon steel bar, flat-rolled, plate, structural and tubing |
2
| No. of | ||||
| Trade Name | Locations | Primary Products Processed & Distributed | ||
Earle M. Jorgensen Company |
||||
Earle M. Jorgensen |
31 | Specialty bar and tubing | ||
Encore Metals USA |
3 | Stainless and alloy bar, plate and tube | ||
Steel Bar |
1 | Carbon steel bars and tubing | ||
Everest Metals (Suzhou) Co., Ltd. |
1 | Aluminum plate and bar | ||
Feralloy Corporation |
||||
Acero Prime (40%-owned) |
3 | Toll processing (slitting and leveling) of carbon steel | ||
Feralloy |
5 | Flat-rolled steel service centers | ||
Feralloy Processing Company (51%-owned) |
1 | Toll processing (leveling and blanking) of carbon steel | ||
Indiana Pickling & Processing (56%-owned) |
1 | Toll processing (pickling) of carbon steel | ||
Oregon Feralloy Partners (40%-owned) |
1 | Toll processing (leveling and blanking) of carbon steel | ||
Infra — Metals Co. |
6 | Carbon steel, bar, plate, structural and tubing | ||
Liebovich Bros., Inc. |
||||
Liebovich Steel & Aluminum Company |
3 | Full-line service centers | ||
Custom Fab Company |
1 | Metal fabrication | ||
Good Metals Company |
1 | Tool and alloy steels | ||
Hagerty Steel & Aluminum Company |
1 | Plate and flat-rolled carbon steel | ||
Metals Supply Company, Ltd. |
2 | Carbon steel bar, flat-rolled, plate, structural and tubing | ||
Metalweb Limited |
4 | Aluminum sheet, plate and bar | ||
Pacific Metal Company |
6 | Aluminum and coated carbon steel | ||
PDM Steel Service Centers, Inc. |
8 | Carbon steel bars, flat-rolled, plate, structural and tubing | ||
Phoenix Corporation |
||||
Phoenix Metals Company |
11 | Flat-rolled aluminum, stainless steel and coated carbon steel | ||
Precision Flamecutting and Steel, Inc. |
1 | Carbon, alloy, and HSLA steel plate | ||
Precision Strip, Inc. |
||||
Precision Strip |
10 | Toll processing (slitting, leveling, blanking) of aluminum, stainless steel and carbon steel | ||
Precision Strip de Mexico |
1 | Toll processing (slitting, leveling, blanking) of aluminum, stainless steel and carbon steel | ||
Reliance Metalcenter Asia Pacific Pte. Ltd. |
1 | Aluminum plate, sheet and coil | ||
Reliance Metals Canada Ltd. |
||||
Earle M. Jorgensen (Canada) |
5 | Specialty bar and tubing | ||
Encore Metals |
4 | Stainless and alloy bar, plate and tube | ||
Team Tube Canada ULC |
5 | Alloy and carbon steel tubing | ||
Service Steel Aerospace Corp. |
||||
Service Steel Aerospace |
2 | Stainless and alloy specialty steels | ||
Dynamic Metals International |
1 | Maraging and specialty steels | ||
United Alloys Aircraft Metals |
1 | Titanium products | ||
Sugar Steel Corporation |
1 | Carbon steel bar, plate, structural and tubing | ||
Siskin Steel & Supply Company, Inc. |
||||
Siskin Steel |
5 | Full-line service centers | ||
Athens Steel |
1 | Carbon steel structural, flat-rolled and ornamental iron | ||
East Tennessee Steel Supply |
1 | Carbon steel plate, bar and structural | ||
Industrial Metals and Surplus/Georgia Steel |
1 | Carbon steel structural, flat-rolled and ornamental iron | ||
Toma Metals, Inc. |
1 | Stainless steel sheet and coil |
3
| No. of | ||||
| Trade Name | Locations | Primary Products Processed & Distributed | ||
Valex Corp. |
||||
Valex |
1 | Electropolished stainless steel tubing and fittings | ||
Valex China Co., Ltd. |
1 | Electropolished stainless steel tubing and fittings | ||
Valex Korea Co., Ltd. |
1 | Electropolished stainless steel tubing and fittings | ||
Viking Materials, Inc. |
2 | Flat-rolled carbon steel | ||
Yarde Metals, Inc. |
7 | Stainless steel and aluminum plate, rod and bar |
We serve our customers primarily by providing quick delivery, metals processing and inventory
management services. We purchase a variety of metals from primary producers and sell these
products in small quantities based on our customers’ needs. We performed metals processing
services, or first-stage processing, on approximately 37% of our sales orders in 2009 before
distributing the product to manufacturers and other end-users. For approximately 45% of our 2009
orders we delivered the metal to our customer within 24 hours from receipt of an order. These
services save time, labor, and expense for our customers and reduce their overall manufacturing
costs. During 2009, we handled approximately 17,200 transactions per business day, with an average
price of approximately $1,220 per transaction. Our net sales were $5.32 billion for the 2009 year.
We believe that our focus on small orders with quick turnaround differentiates us from many of the
other large metals service center companies and allows us to better service our customers,
resulting in higher profits than those generated by the other large metals service center
companies.
Historically, we have expanded both through acquisitions and internal growth. Since our
initial public offering in September 1994, we have successfully purchased more than 40 businesses.
From 1984 to September 1994, we acquired 20 businesses. Our internal growth activities during the
last few years have been at historically high levels for us and have included the opening of new
facilities, adding to our processing capabilities and relocating existing operations to larger,
more efficient facilities. We will continue to evaluate acquisition opportunities and we expect to
continue to grow our business through acquisitions and internal growth initiatives, particularly
those that will diversify our products, customer base and geographic locations.
Acquisitions
We did not complete any acquisitions during 2009 because of the uncertain economic climate.
There were very few companies in our industry offered for sale in 2009 and those that were in the
market were not attractive to us. We do, however, expect many companies in our industry to be
offered for sale later in 2010. We will actively evaluate these opportunities and pursue those
that meet our disciplined acquisition criteria. Please see Note 2 of the consolidated financial
statements for a discussion on acquisitions completed during 2008 and 2007, including our largest
acquisition to date completed August 1, 2008.
Internal Growth Activities
Despite the continued deterioration of the economy in 2009, we maintained our focus on organic
growth by opening new facilities, building or expanding existing facilities and adding processing
equipment with total capital expenditures of $69.9 million. We continued to expand our geographic
presence in 2009 with Phoenix Metals Company opening a new location in Richmond, Virginia, Earle M.
Jorgensen Company starting construction on a new facility in Nusajaya, Malaysia, which is scheduled
to open in 2010 and Chatham Steel Corporation buying land for a new facility to be built in
Ironton, Ohio. Operations in existing markets were also expanded during 2009, with PDM Steel
Service Centers moving into a newly constructed, larger and more efficient facility in Las Vegas,
Nevada and Precision Strip expanding and improving an existing facility in Kenton, Ohio. We expect
to continue to expand our existing operations in 2010, with new facilities planned, or currently
under construction, for Yarde Metals in Limerick, Pennsylvania, Reliance Metals Canada in Edmonton,
Alberta, Canada, and Earle M. Jorgensen in Orlando, Florida and Memphis, Tennessee. During 2009 we
also consolidated and closed a few small operations that did not impact our ability to service our
customers.
Our 2010 capital expenditure budget is approximately $140 million with much of this related to
internal growth activities comprised of expansions of existing facilities and purchases of
equipment as well as establishing a presence in new geographic markets. We also plan to exercise
purchase options on various facilities that we currently lease. We will continue to evaluate and
execute additional growth projects as appropriate, given the economic conditions and outlook at the
time.
Our executive officers maintain a control environment that is focused on integrity and ethical
behavior, establish general policies and operating guidelines and monitor adherence to proper
financial controls, while our division managers and subsidiary officers have autonomy with respect
to day-to-day operations. This balanced, yet entrepreneurial, management style has enabled us to
improve the productivity and profitability both of acquired businesses and of our own expanded
operations. Key
management personnel are eligible for incentive compensation based, in part, on the
profitability of their particular division or subsidiary and, in part, on the Company’s overall
profitability.
4
We seek to increase our profitability by expanding our existing operations and acquiring
businesses that diversify or enhance our customer base, product range, processing services and
geographic coverage. We have developed and maintained an excellent reputation in the industry for
our integrity and the quality and timeliness of our service to customers.
Customers
Our customers purchase from us and other metals service centers to obtain value-added metals
processing, readily available inventory, reliable and timely delivery, flexible minimum order size
and quality control. Many of our customers deal exclusively with service centers because the
quantities of metal products that they purchase are smaller than the minimum orders specified by
mills, because those customers require intermittent deliveries over long or irregular periods, or
because those customers require specialized processing services. We believe that metals service
centers have also enjoyed an increasing share of total metal shipments due to the focus of the
capital goods and other manufacturing industries on just-in-time inventory management and materials
management outsourcing, and because metal producers have reduced in-house direct sales efforts to
small sporadic purchasers in order to enhance their production efficiency. The consolidation of
carbon steel mills that occurred during the 2001 to 2003 period has further reduced the number of
potential sources of metal available to customers purchasing small quantities of metal.
We have more than 125,000 metals service center customers in various industries. Our
customers are manufacturers and end-users in the general manufacturing, non-residential
construction, transportation (rail, truck trailer and shipbuilding), aerospace, energy, electronics
and semiconductor fabrication and related industries. In 2003, many of our suppliers also became
our customers as a result of our purchase of Precision Strip, which typically sells processing
services, but not metal, to larger customers, such as mills and original equipment manufacturers
(“OEM’s”), and in larger annual volumes than we have experienced historically. Precision Strip
also has indirectly increased our participation in the auto and appliance end markets with the auto
exposure primarily relating to the processing and delivery of metal for the transplants, or “New
Domestic” companies.
Our metals service centers wrote and delivered over 4,365,000 orders during 2009 at an average
price of approximately $1,220 per order. Most of our metals service center customers are located
within a 200-mile radius of the metals service center serving them. The proximity of our centers
to our customers helps us provide just-in-time delivery to our customers as well as increases the
likelihood of repeat business. In 2009, approximately 85% of our orders were from repeat
customers. With our fleet of approximately 1,500 trucks (some of which are leased), we are able to
service many smaller customers. Moreover, our computerized order entry system and flexible
production scheduling enable us to meet customer requirements for short lead times and just-in-time
delivery. We believe that our long-term relationships with many of our customers significantly
contribute to the success of our business. Providing prompt and efficient services and quality
products at reasonable prices are important factors in maintaining these relationships.
Our acquisitions in recent years have increased our international exposure both from a
customer and physical location perspective. In addition, we have built and opened international
locations in recent years to service specific industries, typically to support key customers that
are producing in those international markets. Net sales of our international locations (based on
where the shipments originated from) accounted for approximately 4% of our 2009 net sales, or
$195.9 million. However, our net sales to international customers (based on the shipping
destination) were approximately 6% of our 2009 net sales or $313.0 million, with approximately 59%
of these sales, or $184.1 million, to Canadian customers.
Customer demand may change from time to time based on, among other things, general economic
conditions and industry capacity. Many of the industries in which our customers compete are
cyclical in nature. Because we sell to a wide variety of customers in many industries, we believe
that the effect of such changes on us is significantly reduced. In addition, many of our customers
are small job shops and fabricators who also have a diverse customer base and have the versatility
to service different end markets when an existing market slows. However, our diversity could not
overcome the negative impact of the current global economic downturn and financial crisis as the
recession significantly affected all industries and geographic regions.
Furthermore, due to the economic recession and tightening of the credit markets, we continue
to closely monitor the viability of our customers and their credit worthiness in all of our end
markets and geographic areas. We sell very little metal to the auto and residential housing
markets, which were severely impacted beginning in 2007. Because of this, our business was strong
through most of 2008 until the industrial economy tightened in the 2008 fourth quarter. Beginning
with the 2008 fourth quarter
and throughout the first half of 2009 we saw a rapid and precipitous decline in demand and
prices for almost all of our products. Our customers began buying minimal amounts of metal and
many continue to have limited access to capital.
5
The reduced buying patterns of our customers created extremely competitive markets for service
centers. As a result, we lowered selling prices to retain volume, negatively impacting our profit
margins, primarily in the first half of 2009 when the industry was in an inventory destocking mode.
Even though pricing for most products we sell has increased somewhat from the bottoms they reached
in the summer of 2009, demand still continues to be at low levels. We believe that our ability to
service customer orders in small quantities and with next day service provides a substantial
advantage to metal buyers in the current environment. We are uncertain as to when demand from our
customers will improve and believe that increased demand is needed to support increased prices for
metal products.
Although many customers requested extended payment terms in 2009, our 2009 days sales
outstanding (“DSO”) in receivables was at 42 days as of December 31, 2009, unchanged from December
31, 2008. Most customers pay in 30 to 60 days. Although our 2009 year-end DSO remained unchanged
from last year, we did experience increased closures and bankruptcy filings in the customer end
markets, which resulted in our highest ever write-offs of uncollectible customer accounts. Our
total accounts receivable write-offs in 2009 were $19.6 million, or 0.4% of sales, compared to $8.1
million or 0.1% of sales and $5.9 million or 0.1% of sales in 2008 and 2007, respectively. We
continue to monitor the financial health of all of our customers across all of our end markets and
geographic areas and may continue to see increased write-offs in 2010 compared to our historical
amounts, especially if business conditions improve and our customers need to increase their working
capital levels. The diversity of our customer base somewhat reduces the impact of any single
customer, as our largest customer in 2009 represented 2.7% of our sales, and all other customers
were less than 1% of our sales. Only five customers had total 2009 purchases greater than $25
million.
California was our largest market for many years, but we have expanded our geographic coverage
in recent years and the Midwest region of the United States has become our largest market.
Although our sales dollars in each of the regions we serve have generally increased, the percent of
total sales in each region has changed as we have expanded our network. California represented 13%
of our 2009 sales, which is a significant decrease from 45% of our 1997 sales. The Midwest region,
which we entered in 1999, represented 25% of our 2009 sales.
The geographic breakout of our sales based on the location of our metals service center
facilities in each of the three years ended December 31 was as follows:
| 2009 | 2008 | 2007 | ||||||||||
Midwest |
25 | % | 26 | % | 25 | % | ||||||
Southeast |
18 | % | 19 | % | 19 | % | ||||||
West/Southwest |
18 | % | 16 | % | 12 | % | ||||||
California |
13 | % | 14 | % | 16 | % | ||||||
Northeast |
8 | % | 6 | % | 6 | % | ||||||
Mid-Atlantic |
6 | % | 5 | % | 4 | % | ||||||
Pacific Northwest |
5 | % | 6 | % | 8 | % | ||||||
Mountain |
3 | % | 4 | % | 5 | % | ||||||
International |
4 | % | 4 | % | 5 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
Suppliers
We purchase our inventory from the major metals mills, both domestic and foreign, and have
multiple suppliers for all of our product lines. Our major suppliers of domestic carbon steel
products include California Steel Industries, Inc., Gerdau Ameristeel Corporation (including
Chaparral Steel Company), Evraz Claymont Steel, Evraz Oregon Steel Mills, ArcelorMittal, Nucor
Corporation, Steel Dynamics, Inc., SSAB and United States Steel Corporation. Allegheny
Technologies Incorporated, AK Steel, North American Stainless and ThyssenKrupp AG supply stainless
steel products. We are a recognized distributor for various major aluminum companies, including
Alcoa Inc., Alcan Aluminum Limited, Aleris International, Inc., Kaiser Aluminum Corp., Novelis Inc.
and Sapa Group.
From 2001 through 2003, many domestic steel mills entered bankruptcy proceedings, which
resulted in significant consolidation at the carbon steel mill level. The primary domestic mills
have exercised pricing discipline since this time resulting in generally higher prices for carbon
steel products beginning in 2004. The mills have exercised their discipline by reducing their
6
production capacity when a supply demand imbalance was anticipated. In general, the higher
prices for carbon steel have been supported since 2004 by limited imports to the U.S. due to strong
global demand and a weak U.S. dollar, and increased raw material costs. Although there has been
significant volatility in carbon steel pricing since 2004, the low end of the pricing has been at
historically high levels. Our operating results are sensitive to changes in the costs of our
products as our selling prices usually change when metal costs change. If costs and selling prices
increase and we maintain the same gross profit percentage, we generate higher levels of gross
profit and pre-tax income dollars for the same operational efforts. Conversely, if pricing
declines, we will typically generate lower levels of gross profit and pre-tax income dollars.
Because changes in pricing do not require us to adjust our expense structure, other than any impact
on incentive-based compensation, the impact on our results of operations from changes in pricing is
much greater than the effect of volume changes.
In 2008, mill pricing for carbon steel products almost doubled in the first half of the year
and then declined precipitously beginning in the 2008 fourth quarter and throughout the first half
of 2009 due to the poor global demand levels. Average pricing for the benchmark carbon hot rolled
steel product in 2009 declined by about 44% from 2008 averages (according to American Metal
Market). Although only about 5% of our 2009 sales dollars were in carbon steel hot rolled coil,
pricing for this product is commonly used by Reliance and others in the industry as an indicator of
overall carbon steel pricing. During the period of decline, the mills reduced their capacity to
less than 50% as they saw the significant deterioration in demand levels. We believe this reduction
in capacity prevented carbon steel pricing from falling further and supported a “bottom” in pricing
for the benchmark carbon hot rolled steel product at about $390 a ton in May 2009 (according to
American Metal Market), which was still at a relatively high level compared to pricing levels
experienced for the same benchmark product during the last recessionary period from 2001 to 2003.
February 2010 prices for the same hot rolled carbon steel product were approximately $600 a ton
(according to American Metal Market). The higher costs for carbon steel products experienced
during the second half of 2009 and so far in 2010 have been primarily driven by increasing raw
material costs as opposed to higher end use demand. Similarly, costs for most aluminum and
stainless steel products were declining throughout the first half of 2009 until the trend generally
reversed during the second half of 2009 and so far in 2010. Although aluminum and stainless costs
have remained somewhat more volatile in the second half of 2009, their average prices have
generally been higher during the second half of 2009 as compared to the first half. Costs for
products that experienced the least volatility were primarily heat treated aluminum and alloy steel
products because of their specialty nature. Until there is a meaningful improvement in demand we
do not anticipate that metal prices
will increase significantly from current levels. Further demand weakening, domestic mills increasing
production without offsetting demand increases or increased imports to the U.S. could weaken
pricing.
Because of our total volume of purchases and our long-term relationships with our suppliers,
we believe that we are generally able to purchase inventory at the best prices offered by the
suppliers, given the order size. We believe that we are not dependent on any one of our suppliers
for metals. In recent years, when the supply of certain metals was tight, we believe that these
relationships provided an advantage to us in our ability to source product and have it available
for our customers. Our size and strong relationships with our suppliers is now more important
because mill consolidation has somewhat reduced the number of suppliers.
Backlog
Because of the just-in-time delivery and the short lead-time nature of our business, we do not
believe information on our backlog of orders is material to an understanding of our metals service
center business.
7
Products and Processing Services
We provide a wide variety of processing services to meet each customer’s specifications and
deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of
products in inventory. We often deliver orders that do not require extensive or specialized
processing to the customer within 24 hours of receiving the order. Our product mix has changed
mainly as a result of our acquisitions. Flat-rolled carbon steel products, which generally have
the most volatile and competitive pricing, accounted for only 11% of our 2009 sales. Our sales
dollars by product type as a percentage of total sales in each of the three years ended December 31
were as follows:
| 2009 | 2008 | 2007 | ||||||||||||
| 13 | % | 10 | % | 7 | % | carbon steel structurals | ||||||||
| 12 | % | 13 | % | 11 | % | carbon steel plate | ||||||||
| 11 | % | 12 | % | 9 | % | carbon steel tubing | ||||||||
| 9 | % | 10 | % | 10 | % | carbon steel bar | ||||||||
| 5 | % | 5 | % | 3 | % | hot rolled steel sheet and coil | ||||||||
| 4 | % | 3 | % | 4 | % | galvanized steel sheet and coil | ||||||||
| 2 | % | 2 | % | 2 | % | cold rolled steel sheet and coil | ||||||||
Carbon Steel |
56 | % | 55 | % | 46 | % | ||||||||
| 6 | % | 6 | % | 7 | % | aluminum bar and tube | ||||||||
| 6 | % | 4 | % | 5 | % | heat-treated aluminum plate | ||||||||
| 4 | % | 4 | % | 4 | % | common alloy aluminum sheet and coil | ||||||||
| 1 | % | 1 | % | 2 | % | common alloy aluminum plate | ||||||||
| 1 | % | 1 | % | 1 | % | heat-treated aluminum sheet and coil | ||||||||
Aluminum |
18 | % | 16 | % | 19 | % | ||||||||
| 6 | % | 7 | % | 10 | % | stainless steel bar and tube | ||||||||
| 5 | % | 5 | % | 6 | % | stainless steel sheet and coil | ||||||||
| 2 | % | 2 | % | 3 | % | stainless steel plate | ||||||||
Stainless Steel |
13 | % | 14 | % | 19 | % | ||||||||
| 5 | % | 6 | % | 7 | % | alloy bar and rod | ||||||||
| 1 | % | 1 | % | 1 | % | alloy tube | ||||||||
| 1 | % | 1 | % | 1 | % | alloy plate, sheet and coil | ||||||||
Alloy |
7 | % | 8 | % | 9 | % | ||||||||
| 2 | % | 2 | % | 2 | % | toll processing of aluminum, carbon steel and stainless steel | ||||||||
| 4 | % | 5 | % | 5 | % | miscellaneous, including brass, | ||||||||
| copper and titanium | ||||||||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||||
We are not dependent on any particular customer group or industry because we process and
distribute a variety of metals. Because of this diversity of product type and material, we believe
that we are less exposed to fluctuations or other weaknesses in the financial or economic stability
of particular customers or industries. We are also less dependent on particular suppliers.
For sheet and coil products, we purchase coiled metal from primary producers in the form of a
continuous sheet, typically 36 to 60 inches wide, between .015 and .25 inches thick, and rolled
into 3- to 20-ton coils. The size and weight of these coils require specialized equipment to move
and process the coils into smaller sizes and various products. Many of the other products that we
carry also require specialized equipment. Few of our customers have the capability to process the
metal into the desired sizes.
After receiving an order, we enter it into our computerized order entry system, select
appropriate inventory and schedule the processing to meet the specified delivery date. In 2009, we
delivered approximately 45% of our orders within 24 hours of the customer placing the order with
us. We attempt to maximize the yield from the various metals that we process by combining customer
orders to use each product that we purchase to the fullest extent practicable.
8
Few metals service centers offer the full scope of processing services and metals that we
provide. In 2009, we performed processing services for approximately 37% of our sales orders. Our
primary processing services are described below:
| • | Bar turning involves machining a metal bar into a smaller diameter. | ||
| • | Bending is the forming of metals into various angles. | ||
| • | Blanking is the cutting of metals into close-tolerance square or rectangular shapes. | ||
| • | Deburring is the process used to smooth the sharp, jagged edges of a cut piece of metal. | ||
| • | Electropolishing is the process used on stainless steel tubing and fittings to simultaneously smooth, brighten, clean and passivate the interior surfaces of these components. Electropolishing is an electrochemical removal process that selectively removes a thin layer of metal, including surface flaws and imbedded impurities. Electropolishing is a required surface treatment for all ultra high-purity components used in the gas distribution systems of semiconductor manufacturers worldwide and many sterile water distribution systems of pharmaceutical and biotechnology companies. | ||
| • | Fabricating includes performing second- and/or third-stage processing per customer specifications, typically to provide a part, casing or kit, which is used in the customer’s end product. | ||
| • | Forming involves bending and forming plate or sheet products into customer-specified shapes and sizes with press brakes. | ||
| • | Grinding or blanchard grinding involves grinding the top and/or bottom of carbon or alloy steel plate or bars into close tolerance. | ||
| • | Leveling (cutting-to-length) involves cutting metal along the width of a coil into specified lengths of sheets or plates. | ||
| • | Machining refers to performing multiple processes to a piece of metal to produce a customer-specified component part. | ||
| • | Oscillate slitting involves slitting the metal into specified widths and then oscillating the slit coil when it is wound. The oscillated coil winds the strip metal similar to the way fishing line is wound on a reel rather than standard ribbon winding. An oscillate coil can typically hold five to six times more metal than a standard coil, which allows customers to achieve longer production run times by reducing the number of equipment shut-downs to change coils. | ||
| • | Pickling involves treating metal surfaces with chemicals to remove impurities, such as stains, inorganic contaminants, and rust or scale, from ferrous metals, copper, and aluminum alloys. | ||
| • | Pipe threading refers to the cutting of threads around the circumference of the pipe. | ||
| • | Polishing changes the texture of the surface of the metal to specific finishes in accordance with customer specifications. | ||
| • | Precision plate sawing involves sawing plate (primarily aluminum plate products) into square or rectangular shapes to tolerances as close as 0.003 of an inch. | ||
| • | Punching is the cutting of holes into carbon steel beams or plates by pressing or welding per customer specifications. | ||
| • | Routing produces various sizes and shapes of aluminum plate according to customer-supplied drawings through the use of CNC controlled machinery. | ||
| • | Sawing involves cutting metal into customer-specified lengths, shapes or sizes. | ||
| • | Shape cutting, or burning, can produce various shapes according to customer-supplied drawings through the use of CNC controlled machinery. This procedure can include the use of oxy-fuel, plasma, high-definition plasma, laser burning or water jet cutting for carbon, aluminum and stainless steel sheet and plate. | ||
| • | Shearing is the cutting of metal into small, precise square or rectangular pieces. | ||
| • | Skin milling grinds the top and/or bottom of a large aluminum plate into close tolerance. | ||
| • | Slitting involves cutting metal to specified widths along the length of the coil. | ||
| • | Tee splitting involves splitting metal beams. Tee straightening is the process of straightening split beams. | ||
| • | Trepanning involves removing the desired diameter from sheet metal, plates, or structural sections by cutting out a solid disk. | ||
| • | Twin milling grinds one or all six sides of a small square or rectangular piece of aluminum plate into close tolerance. | ||
| • | Welding is the joining of one or more pieces of metal. | ||
| • | Wheelabrating, shotblasting and bead-blasting involve pressure blasting metal grid onto carbon steel products to remove rust and scale from the surface. |
We generally process specific metals to non-standard sizes only at the request of customers
pursuant to purchase orders. We do not maintain a significant inventory of finished products, but
we carry a wide range of metals to meet the short lead time and
just-in-time delivery requirements of our customers. Our metals service centers maintain
inventory and equipment selected to meet the needs of that facility’s customers.
9
Marketing
As of year-end 2009, we had approximately 1,460 sales personnel located in 42 states, Belgium,
Canada, China, France, Malaysia, Mexico, Singapore, South Korea and the United Kingdom that provide
marketing services throughout each of those areas, as well as nearby locations. The sales
personnel are organized by division or subsidiary among our profit centers and are divided into two
groups. Our outside sales personnel are considered those personnel who travel throughout a
specified geographic territory to maintain relationships with our existing customers and develop
new customers. Those sales personnel who remain at the facilities to write and price orders are
our inside sales personnel. The inside sales personnel generally receive incentive compensation,
in addition to their base salary, based on the gross profit or pretax profit of their particular
profit center. The outside sales personnel generally receive incentive compensation based on the
gross profit from their particular geographic territories.
Industry and Market Cycles
We distribute metal products to our customers in a variety of industries, including
non-residential construction, manufacturing, transportation, aerospace, energy and semiconductor
fabrication. Many of the industries in which our customers compete are cyclical in nature and are
subject to changes in demand based on general economic conditions. We sell to a wide variety of
customers in diverse industries to reduce the effect of changes in these cyclical industries on our
results. However, our diversity could not overcome the negative impact of the current global
economic downturn and financial crisis as the recession significantly affected all industries.
Beginning with the 2008 fourth quarter, when our industry first felt the impact of the global
economic recession, and continuing through the first half of 2009, we saw a rapid and precipitous
decline in demand and prices for almost all of our products. According to the Metals Service
Center Institute, tons sold during 2009 were down approximately 37% for the metals service center
industry in North America compared to 2008. Our 2009 tons sold on a same-store basis were down
approximately 32% from 2008.
All major industries and end markets that we sell to were negatively impacted during 2009.
Aerospace held up better for us than most other end markets that we sell to, as a large portion of
our aerospace business is military and defense related. Also, we believe that the impact on us
from the auto and residential construction markets, which were impacted earlier and more severely
than most other markets, was limited during this downturn because we have minimal direct exposure
to these markets. The auto industry improved in mid-2009 though activity is still at relatively
low levels, and although we did not directly benefit from the demand improvement, we did benefit
indirectly from price stability. We believe about one-third of our business is related to
non-residential construction, which was negatively impacted during this downturn and we do not
expect any meaningful recovery in this area until 2011. We saw some improvement in the electronics
and semiconductor areas in the second half of 2009 that we believe will continue into next year. We
have also seen some increased quoting activity in infrastructure in the second half of 2009 and
remain hopeful that work in that area will begin to materialize soon. All other major end markets
that we serve, including manufacturing, energy (oil and gas) and transportation (heavy truck, truck
trailer, and rail car industries) experienced similar demand declines during 2009 compared to 2008
with slight improvements in the amount of metal they are buying from us in the second half of 2009
that have, so far, continued into 2010.
Managing through both price and demand volatility is a normal part of our business and we have
successfully managed through such cycles for many years. However, the 2008 and 2009 cycles were
more dramatic than those we have experienced historically. Because of the dramatic reduction in
demand beginning in the 2008 fourth quarter and continuing throughout the first half of 2009, mills
cut prices, leaving most service centers with large amounts of inventory on hand at a higher cost
than replacement cost. In reaction to this, service centers, including Reliance, entered an
inventory destocking mode to try to clear out their higher cost material. However, poor customer
demand required that selling prices be lowered, which resulted in significant deterioration in
gross profit margins, causing many service center companies to operate at a loss during 2009.
Pricing for most products we sell has increased somewhat from the bottoms reached in the summer of
2009; however, demand continues to be at low levels.
Fluctuations in the cost of our materials affect the prices we can charge to our customers.
We have historically been able to pass increases in metal costs on to our customers, as costs
typically increase due to strong demand. In the current environment of relatively stable prices
and demand, we expect to be able to maintain relatively normal gross profit margins; however there
could be pressure on our gross profit margins due to the weak demand levels. We cannot predict
whether the margin between our metal
10
costs and selling prices will improve, decline from or remain at the levels experienced during
the 2009 fourth quarter, especially if demand declines further or if costs of domestic metals
decline. However, if metals demand and costs, as well as related selling prices, remain at current
levels or increase, we expect to remain profitable.
Competition
The metals distribution industry is highly fragmented and competitive. We have numerous
competitors in each of our product lines and geographic locations, and competition is most
frequently local or regional. Most of our competitors are smaller than we are, but we still face
strong competition from national, regional and local independent metals distributors and the
producers themselves, some of which have greater resources than we do. As reported in the April
2009 issue of Purchasing magazine, it is estimated that there were approximately 3,300 intermediate
steel processors and metals service center facilities in North America in 2008. Purchasing
magazine has identified Reliance as the largest metals service center company in North America
(based upon 2008 revenue). According to the April 2009 issue of Purchasing magazine, the 2008
revenues for the five largest North American metals service center companies ranged from $3.15
billion to $8.72 billion for total revenues of $25.59 billion, which represents approximately 16.7%
of the estimated $153 billion total revenue for the metals service center industry in 2008. Our
2008 sales of $8.72 billion represented approximately 5.7% of the estimated $153 billion industry
total. We continue to be the largest North American metals service center company on a revenue
basis.
We compete with other companies on price, service, quality and availability of products. We
maintain centralized relationships with our major suppliers and a decentralized operational
structure. We believe that this division of responsibility has increased our ability to obtain
competitive prices of metals and to provide more responsive service to our customers. In addition,
we believe that the size of our inventory, the different metals and products we have available, and
the wide variety of processing services we provide, distinguish us from our competition. We
believe that we have increased our market share during recent years due to our strong financial
condition, our high quality of service, our acquisitions and opportunities created by activities of
certain of our competitors, as well as our focus on small order sizes with quick turnaround.
Starting in the fourth quarter of 2008 and through the first half of 2009 when both customer
demand and metal pricing were rapidly deteriorating, competition in the metals service center
industry reached a level that we had not experienced before. Because of the sudden slowing in
demand, service centers had higher quantities of metal on hand than they would typically carry to
support their demand base. In addition, the inventory on hand was at a higher cost than the
replacement cost of the metal being sold by the mills. This environment allowed customers to demand
that service centers lower their prices to be more in line with current replacement cost, even if
the service center had to fill the order with higher cost metal. This eroded gross profit margins
on these orders. The competition was further heightened because of the general lack of credit
availability, motivating many service centers to liquidate as much inventory as possible. These
competitive forces continued well into the 2009 third quarter. Both demand and pricing have
stabilized somewhat and during the 2009 fourth quarter we achieved FIFO gross profit margins
consistent with our historical levels; however, demand is still weak, which contributes to a
vulnerable pricing environment. Although inventory destocking is over for the most part, because
of low demand levels, some service centers are still converting inventory to cash without regard to
profit levels, which generally requires us to lower our prices to be competitive. This has, and
could continue to, reduce our profit margins.
Quality Control
Procuring high quality metal from suppliers on a consistent basis is critical to our business.
We have instituted strict quality control measures to assure that the quality of purchased raw
materials will enable us to meet our customers’ specifications and to reduce the costs of
production interruptions. In certain instances, we perform physical and chemical analyses on
selected raw materials, typically through a third party testing lab, to verify that their
mechanical and dimensional properties, cleanliness and surface characteristics meet our
requirements. We also conduct certain analyses of surface characteristics on selected processed
metal before delivery to the customer. We believe that maintaining high standards for accepting
metals ultimately results in reduced return rates from our customers.
In 2009, a total of 108 of our facilities maintained ISO 9001:2000 or ISO 9001:2008
certifications. The ISO 9001:2000 quality standard includes a matrix to record and review customer
satisfaction and organizes the quality standard requirements to about eight elements. The
certification takes approximately one year to obtain. Each facility seeking ISO certification is
required to establish a quality system that is documented in a quality control manual that affects
all aspects of the facility’s operations, including sales, product inspections, product storage,
delivery and documentation. A certifying agent performs a physical audit of each facility every
six months to determine that the facility is in fact following the procedures set forth in the
quality control manual. A recertification is required for each facility every three years. At the
next recertification period, our
locations that currently maintain ISO 9001:2000 certifications will recertify to ISO
9001:2008, which replaces ISO 9001:2000 quality standards. There are no new significant
requirements under ISO 9001:2008.
11
Initially in 1996, when we first began the certification process, we expected that more
customers would require such certification, but we have learned that for the types of products and
services that most of our facilities provide, very few of our customers require such certification
and most of our customers have responded that they would purchase products from Reliance or its
subsidiaries regardless of such certification. However, we believe that going through the
certification process allows our facilities to improve their efficiency and the quality of products
and services provided to our customers.
Our Precision Strip subsidiary maintains ISO/TS 16949:2002 certifications at its eleven
facilities. ISO/TS 16949:2002 is an ISO Technical Specification, which aligns existing American
(QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive quality systems standards
within the global automotive industry. Quality System Requirements QS-9000 (“QS-9000”) is the
common quality standard for automotive suppliers and is based upon the 1994 edition of ISO 9001,
with additional requirements specific to the automotive industry. Our Bralco Metals division, and
our AMI Metals, Inc. and Service Steel Aerospace Corporation subsidiaries maintain AS 9100
certification at all of their facilities. AS 9100 is a standardized quality management system
specific to the aerospace industry. The standards emphasize areas that impact process and service,
safety, quality and reliability for aerospace products. Many aerospace organizations require their
suppliers to have AS 9100 certification. Our Valex Korea subsidiary maintains ISO 14001:2004
certification at its operating facility in South Korea. ISO 14001:2004 gives the generic
requirements for an environmental management system. The intention of ISO 14001:2004 is to provide
a framework for a strategic approach to the organization’s environmental policy, plans and actions.
Systems
Our Reliance divisions and certain of our subsidiaries use the StelplanÔ and
eStelplanÔ manufacturing and distribution information systems. StelplanÔ and
eStelplanÔ are registered trademarks of Invera, Inc. StelplanÔ and eStelplanÔ
are integrated business application systems with functions ranging from order to cash and procure
to pay cycles. These systems were developed specifically for the metals service center and
processor industry and provide information in real time, such as inventory availability, location
and cost. With this information, our marketing and sales personnel can respond to our customers’
needs more efficiently and more effectively.
Almost fifty of our 200-plus locations use a suite of software products purchased and
developed by our subsidiary Earle M. Jorgensen Company (“EMJ”). In 2009, the Reliance Corporate
and EMJ IT departments merged and the combined team modified certain aspects of the software to
allow it to support multiple entities. This system was rolled out to certain Reliance subsidiaries
in 2009, in addition to the EMJ locations, and we expect more subsidiaries to convert to this
system in 2010. Other subsidiaries use other vendor or in-house developed systems to support their
operations. The basic functionality of the various systems is similar to StelplanÔ but in
many instances has been customized for each of their operations with features to accommodate the
products that they carry, automated equipment interfaces, or other specialized needs. These
systems are included in our internal control testing.
A common financial reporting system, as well as certain other accounting and tax packages are
used company-wide. We have initiated efforts to allow us to identify the appropriate system
solutions to provide a common ERP platform across our operating companies and to develop more
efficient means of consolidating data. This is a multi-phased, multi-year project that will be
pursued and implemented in a manner to limit both operational and financial risk.
Government Regulation
Our metals service centers are subject to many foreign, federal, state and local requirements
to protect the environment, including hazardous waste disposal and underground storage tank
regulations. The only hazardous substances that we generally use in our operations are lubricants,
cleaning solvents and petroleum for fueling our trucks. We pay state-certified private companies
to haul and dispose of our hazardous waste.
Our operations are also subject to laws and regulations relating to workplace safety and
worker health, principally the Occupational Health and Safety Act and related regulations, which,
among other requirements, establish noise, dust and safety standards. We maintain comprehensive
health and safety policies and encourage our employees to follow established safety practices. We
encourage social well being by instituting these high quality labor, health and safety standards.
We do not anticipate that future compliance with such laws and regulations will have a material
adverse effect on our results of operations or financial condition.
12
Certain of our operations sell metal to foreign customers, subjecting us to various export
compliance regulations. We have implemented a company-wide export compliance function to monitor
adherence to our export compliance policy and to provide appropriate training to our operating
personnel. Although the actual dollar amounts of our sales that are subject to these regulations
are not material, penalties assessed to any violations may be material. Although we have
implemented policies and procedures to comply with export compliance regulations, we cannot
guarantee that we will not incur any violations and resulting penalties from such activity.
Environmental
Some of the properties we own or lease are located in industrial areas with histories of heavy
industrial use. We may incur some environmental liabilities because of the location of these
properties. In addition, we are currently investigating and remediating contamination at certain
properties we have acquired or that acquired subsidiaries own or previously owned, but we do not
expect that these liabilities would have a material adverse impact on our results of operations.
All scrap metal produced by our operations is sold to independent scrap metal companies and we
believe is recycled. We continue to evaluate and implement energy conservation and other
initiatives to reduce pollution. If more stringent environmental regulations are enacted this
could have an adverse impact on our financial results.
Employees
As of December 31, 2009, we had approximately 8,870 employees. Approximately 11% of the
employees are covered by collective bargaining agreements, which expire at various times over the
next four years. We have entered into collective bargaining agreements with 39 union locals at 39
of our locations. These collective bargaining agreements have not had a material impact either
favorably or unfavorably on our revenues or profitability at our various locations. We have always
maintained excellent relations with our employees. Over the years we have experienced minor work
stoppages by our employees at certain of our locations, but due to the small number of employees
and the short time periods involved, these stoppages have not had a material impact on our
operations. Employees at certain of our locations have recently de-certified with their local
unions and are now non-union employees. We have never experienced a significant work stoppage.
As a result of the global economic recession that significantly impacted our business activity
beginning in the 2008 fourth quarter, we have made significant reductions in our workforce in order
for us to maintain profitability as personnel costs represent the most significant variable
operating expense that we have and are also the most impacted by changes in our order volumes.
During 2009, we reduced our workforce by approximately 1,700 employees, or 16%. Since September 30,
2008, we reduced our workforce by approximately 2,500 employees, or 22%. In addition, we have
taken many other cost cutting measures including certain changes that impact our employees such as
voluntary time off and reduced work weeks. Many of our employees participate in various bonus
programs based upon the financial results of a particular operation or the Company as a whole.
Because of our lower profitability levels in 2009, our compensation expense was lower as our
employees generally received no or lower bonuses than in 2008.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the
Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended
(“the Exchange Act”). The public may read and copy any materials that we file with the SEC at the
SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains a Website that contains reports, proxy information statements and other
information regarding issuers, including our Company, that file electronically with the SEC. The
public can obtain any documents that we file with the SEC at http://www.sec.gov.
We also make available free of charge on or through our Internet Website
(http://www.rsac.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Reference to our Website is not
intended to incorporate anything on the Website into this report.
Item 1A. Risk Factors
Set forth below are the risks that we believe are material to our investors. Our business, results
of operations and financial condition may be materially adversely affected due to any of the
following risks. The risks described below are not the only ones
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we face. Additional risks of which we are not presently aware or that we currently believe are
immaterial may also harm our business. This section contains forward-looking statements. You should
refer to the explanation of the qualifications and limitations on forward-looking statements set
forth at the beginning of this Report.
Risks Related to Our Business and Industry
Our indebtedness could impair our financial condition and reduce the funds available to us for
other purposes and our failure to comply with the covenants contained in our debt instruments could
result in an event of default that could adversely affect our operating results.
We have substantial debt service obligations. As of December 31, 2009, we had aggregate
outstanding indebtedness of approximately $939.6 million. This indebtedness could adversely affect
us in the following ways:
| • | our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may not be available and if available, may be considerably more costly than our current debt costs; | ||
| • | a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations or other purposes; | ||
| • | some of the interest on debt is, and will continue to be, accrued at variable rates, which may result in higher interest expense in the event of increases in interest rates, which may occur in future periods; | ||
| • | because we may be more leveraged than some of our competitors, our debt may place us at a competitive disadvantage; | ||
| • | our leverage may increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; and | ||
| • | our ability to capitalize on significant business opportunities, including potential acquisitions, and to plan for, or respond to, competition and changes in our business may be limited. |
Our existing debt agreements contain financial and restrictive covenants that limit our
ability to incur additional debt, including restrictions on our ability to make acquisitions or to
finance future operations or other capital needs, and to engage in other activities that we may
believe are in our long-term best interests, including the disposition or acquisition of assets or
other companies or the payment of dividends to our shareholders. Our failure to comply with these
covenants may result in an event of default, which, if not cured or waived, could accelerate the
maturity of our indebtedness or prevent us from accessing availability under our credit facility.
If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to
satisfy our debt obligations and we may not be able to continue our operations as planned. See
discussion regarding our financial covenants in the “Liquidity and Capital Resources” section of
Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We may not be able to generate sufficient cash flow to meet our existing debt service obligations.
Our annual debt service obligations until November 2012, when our revolving credit facility is
scheduled to mature, will be primarily limited to interest and principal payments on multiple
series of privately placed senior notes and our outstanding debt securities, with an aggregate
principal amount of $813.0 million, and on borrowings under our $1.1 billion credit facility. Our
ability to generate sufficient cash flow from operations to make scheduled payments on our debt
obligations will depend on our future financial performance, which will be affected by a range of
economic, competitive and business factors, many of which are outside of our control. For example,
we may not generate sufficient cash flow from our operations or new acquisitions to repay amounts
drawn under our revolving credit facility when it matures in 2012, our private notes when they
mature on various dates between 2010 and 2013 or our debt securities when they mature in 2016 and
2036. If we do not generate sufficient cash flow from operations to satisfy our debt obligations,
we expect to undertake alternative financing plans, such as refinancing or restructuring our debt,
selling assets, reducing or delaying capital investments or seeking to raise additional capital. We
may not be able to consummate any such transaction at all or on a timely basis or on terms, and for
proceeds, that are acceptable to us. These transactions may not be permitted under the terms of our
various debt instruments then in effect, however; our inability to generate sufficient cash flow to
satisfy our debt obligations or to timely refinance our obligations on acceptable terms could
adversely affect our ability to serve our customers and could cause us to reduce or discontinue our
planned operations.
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The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such
fluctuations could adversely affect our operating results, particularly if we cannot pass on higher
metal prices to our customers.
We purchase large quantities of aluminum, carbon, alloy and stainless steel and other metals,
which we sell to a variety of end-users. The costs to us for these metals and the prices that we
charge customers for our products may change depending on many factors outside of our control,
including general economic conditions (both domestic and international), competition, production
levels, raw material costs, customer demand levels, import duties and other trade restrictions,
currency fluctuations and surcharges imposed by our suppliers. We attempt to pass cost increases on
to our customers with higher selling prices but we may not always be able to do so.
We maintain substantial inventories of metal to accommodate the short lead times and delivery
requirements of our customers. Our customers typically purchase products from us pursuant to
purchase orders and typically do not enter into long-term purchase agreements or arrangements with
us. Accordingly, we purchase metal in quantities we believe to be appropriate to satisfy the
anticipated needs of our customers based on information derived from customers, market conditions,
historic usage and industry research. Commitments for metal purchases are generally at prevailing
market prices in effect at the time orders are placed or at the time of shipment. During periods of
rising prices for metal, we may be negatively impacted by delays between the time of increases in
the cost of metals to us and increases in the prices that we charge for our products if we are
unable to pass these increased costs on to our customers immediately. In addition, when metal
prices decline, this could result in lower selling prices for our products
and, as we use existing inventory that we purchased at higher metal prices, lower margins.
Consequently, during periods in which we sell this existing inventory, the effects of changing
metal prices could adversely affect our operating results.
Our business could be adversely affected by economic downturns.
Demand for our products is affected by a number of general economic factors. A decline in
economic activity in the U.S. and other markets in which we operate could materially affect our
financial condition and results of operations. The U.S. economy technically entered an economic
recession in December 2007 and the economic recession spread to many global markets in 2008.
Beginning in the 2008 fourth quarter and throughout 2009, the metals industry, including service
centers and Reliance, felt the effects of the recession. Both demand for our products and pricing
levels declined rapidly and significantly. In addition to reducing our direct business activity,
many of our customers were not able to pay us amounts when they became due, further
affecting our financial condition and results of operations. Although demand and pricing levels
stabilized somewhat during the second half of 2009, demand for our products continues to be at low
levels. We have little visibility as to the duration of the economic downturn, which may cause our
financial condition to worsen from current levels and may continue to threaten the financial
viability of our customers and their ability to pay us.
The prices of metals are subject to fluctuations in the supply and demand for metals worldwide and
changes in the worldwide balance of supply and demand could negatively impact our revenues, gross
profit and net income.
Metal prices are volatile due to, among other things, fluctuations in foreign and domestic
production capacity, raw material availability, metals consumption and foreign currency rates. For
example, in the past few years, China has significantly increased both its consumption and
production of metals and metal products. Initially, China’s large and growing demand for metals
significantly affected the metals industry by diverting supply to China and contributing to the
global increases in metal prices. With China’s increased production of metals, it has become a
significant buyer of natural resources and a net exporter of certain metals. While these
developments can affect global pricing, China has not yet had a significant impact on U.S. pricing
or the pricing for our products. Future changes in China’s general economic conditions or in its
production or export of metals could cause fluctuations in metal prices globally, which could
adversely affect our revenues, gross profit and net income. Due to the recent global recession,
U.S. mills have significantly reduced their production capacities by idling production lines in an
effort to more closely match supply with current demand. Domestic carbon steel mills were operating
at less than 50% of capacity in early 2009, which we believe supported pricing levels well above
pricing levels that would have developed if capacity had not been reduced. Since mid-year 2009,
mill capacity rates have increased to about 70% by the end of 2009 led mainly by increased demand
for flat-rolled products by the auto industry. Pricing for most products has experienced modest
increases since mid-year 2009 mostly driven by increasing raw material costs as opposed to demand.
However, if mills continue to increase production without a corresponding increase in demand,
prices may decline. Global mills, including those in China, may react more irrationally than
domestic mills.
Additionally, significant currency fluctuations in the United States or abroad could
negatively impact our cost of metals and the pricing of our products. A decline in the dollar
relative to foreign currencies may result in increased prices for metals and metal products in the
United States and reduce the amount of metal imported into the U.S. as imported metals become
relatively more expensive. If the value of the dollar improves relative to foreign currencies,
this may result in increased metal being
15
imported into the U.S. that may pressure existing domestic prices for metal. In addition, when
prices for metal products in the U.S. are lower than in foreign markets, metals may be sold in the
foreign markets rather than in the U.S., reducing the availability of metal products in the U.S.,
which may allow the domestic mills to increase their prices.
We operate in an industry that is subject to cyclical fluctuations and any downturn in general
economic conditions or in our customers’ specific industries could negatively impact our revenues,
gross profit and net income.
The metals service center industry is cyclical and impacted by both market demand and metals
supply. Periods of economic slowdown or recession in the United States or other countries, or the
public perception that these may occur, could decrease the demand for our products and adversely
affect our pricing. For example, the recent economic recession significantly impacted our revenue
levels due to both demand and pricing level deterioration beginning in the 2008 fourth quarter and
through the first half of 2009. This deterioration also impacted our gross profit and net income
levels as we had to lower our selling prices to our customers faster than we received lower cost
metal into our inventory. Our inventory costs are currently in line with our replacement costs,
allowing us to improve our gross profit margins to more normal historical levels in the second half
of 2009. However, if either demand or pricing were to decline further, this could further reduce
our revenues, gross profit and net income.
We sell many products to industries that are cyclical, such as the non-residential
construction, semiconductor, energy and transportation industries, including aerospace. Although
many of our direct sales are to sub-contractors or job shops that may serve many customers and industries,
the demand for our products is directly related to, and quickly impacted by, demand for the
finished goods manufactured by customers in these industries, which may change as a result of
changes in the general U.S. or worldwide economy, domestic exchange rates, energy prices or other
factors beyond our control. If we are unable to accurately project the product needs of our
customers over varying lead times or if there is a limited availability of products through
allocation by the mills or otherwise, we may not have sufficient inventory to be able to provide
products desired by our customers on a timely basis. In addition, if we are not able to diversify
our customer base and/or increase sales of products to customers in other industries when one or
more of the cyclical industries that we serve are experiencing a decline, our revenues, gross
profit and net income may be adversely affected.
We compete with a large number of companies in the metals service center industry, and, if we are
unable to compete effectively, our revenues, gross profit and net income may decline.
We compete with a large number of other general-line distributors and specialty distributors
in the metals service center industry. Competition is based principally on price, inventory
availability, timely delivery, customer service, quality and processing capabilities. Competition
in the various markets in which we participate comes from companies of various sizes, some of which
have more established brand names in the local markets that we serve. Accordingly, these
competitors may be better able to withstand adverse changes in conditions within our customers’
industries and may have greater operating and financial flexibility than we have. To compete for
customer sales, we may lower prices or offer increased services at a higher cost, which could
reduce our revenues, gross profit and net income. The significantly lower demand levels during
2009 have escalated competitive pressures, with service centers selling at substantially reduced
prices, and sometimes at a loss, in an effort to reduce their high cost inventory and generate
cash. These competitive pressures could continue to increase as demand and pricing remain at low
levels or fall further. Any increased competitive pressure could cause our revenues, gross profit
and net income to decline further.
If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts
of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may
suffer reduced sales.
We have few long-term contracts to purchase metals. Therefore, our primary suppliers of carbon
steel, alloy steel, stainless steel, aluminum or other metals could curtail or discontinue their
delivery of these metals to us in the quantities we need with little or no notice. Our ability to
meet our customers’ needs and provide value-added inventory management services depends on our
ability to maintain an uninterrupted supply of high quality metal products from our suppliers. If
our suppliers experience production problems, lack of capacity or transportation disruptions, the
lead times for receiving our supply of metal products could be extended and the cost of our
inventory may increase. If, in the future, we are unable to obtain sufficient amounts of the
necessary metals at competitive prices and on a timely basis from our customary suppliers, we may
not be able to obtain these metals from acceptable alternative sources at competitive prices to
meet our delivery schedules. Even if we do find acceptable alternative suppliers, the process of
locating and securing these alternatives may be disruptive to our business, which could have an
adverse impact on our ability to meet our customers’ needs and reduce our sales, gross profit and
net income. In addition, if a significant domestic supply source is discontinued and we cannot find
acceptable domestic alternatives, we may need to find a foreign source of supply. Dependence on
foreign sources of supply could result in longer lead times, increased price volatility, less
favorable payment terms, increased exposure to foreign currency movements and certain tariffs and
duties and require greater levels of working capital. Alternative sources of supply may not
maintain the quality standards that are in place with our
16
current suppliers that could impact our ability to provide the same quality of products to our
customers that we have provided in the past, which could cause our customers to move their business
to our competitors or to file claims against us. There has been significant consolidation at the
metal producer level both globally and within the U.S. This consolidation has reduced the number
of suppliers available to us, which could result in increased metals costs to us that we may not be
able to pass on to our customers and may limit our ability to obtain the necessary metals to
service our customers. The number of available suppliers may be further reduced if the current
economic downturn continues. Lower metal prices and lower demand levels caused certain mills to
reduce their production capacity and, in many cases, to operate at a loss, which could cause one or
more mills to discontinue operations if the losses continue over an extended period of time or if
the mill cannot obtain the necessary financing to fund its operating costs.
We rely upon our suppliers as to the specifications of the metals we purchase from them.
We rely on mill certifications that attest to the physical and chemical specifications of the
metal received from our suppliers for resale and generally, consistent with industry practice, do
not undertake independent testing of such metals. We rely on our customers to notify us of any
metal that does not conform to the specifications certified by the supplying mill. Although our
primary sources of products have been domestic mills, we have and will continue to purchase product
from foreign suppliers when we believe it is appropriate. In the event that metal purchased from
domestic suppliers is deemed to not meet quality specifications as set forth in the mill
certifications or customer specifications, we generally have recourse against these suppliers for
both the cost of the products purchased and possible claims from our customers. However, such
recourse will not compensate us for the damage to our reputation that may arise from sub-standard
products and possible losses of customers. Moreover, there is a greater level of risk that similar
recourse will not be available to us in the event of claims by our customers related to products
from foreign suppliers that do not meet the specifications set forth in the mill certifications. In
such circumstances, we may be at greater risk of loss for claims for which we do not carry, or do
not carry sufficient, insurance.
If we do not successfully implement our acquisition growth strategy, our ability to grow our
business could be impaired.
We may not be able to identify suitable acquisition candidates or successfully complete any
acquisitions or integrate any other businesses into our operations. If we cannot identify suitable
acquisition candidates or are otherwise unable to complete acquisitions, we are unlikely to sustain
our historical growth rates, and, if we cannot successfully integrate these businesses, we may
incur increased or redundant expenses. Moreover, any additional indebtedness we incur to pay for
these acquisitions could adversely affect our liquidity and financial condition. In September
2009, we amended our $1.1 billion credit facility mainly to adjust certain financial covenants
through June 30, 2010. The amendment also includes certain restrictions on our uses of cash for
acquisitions, among other things. Through June 30, 2010, we are limited to cash consideration for
an acquisition of one times our latest twelve months EBITDA. This restriction could prevent us
from completing certain large acquisitions that are attractive to us, or could increase the cost of
the acquisition if we are required to obtain a waiver or further amendment from our bank group to
approve the acquisition.
Because of the recent economic downturn and uncertainty regarding the timing and extent of the
eventual recovery, it may be difficult to reach agreement with potential sellers on the appropriate
valuation of target companies, which may delay or cancel potential acquisitions.
Acquisitions present many risks, and we may not realize the financial and strategic goals that were
contemplated at the time of any transaction.
Historically, we have expanded both through acquisitions and internal growth. Since our
initial public offering in September 1994, we have successfully purchased more than 40 businesses.
From 1984 to September 1994, we acquired 20 businesses. We continue to evaluate acquisition
opportunities and, although we placed acquisitions on hold in 2009 because of the poor economic
climate, we expect to continue to grow our business through acquisitions. Risks we may encounter in
acquisitions include:
| • | the acquired company may not further our business strategy, or we may pay more than it is worth; | ||
| • | the acquired company may not perform as anticipated, which could result in an impairment charge or otherwise impact our results of operations; | ||
| • | we may not realize the anticipated increase in our revenues if a larger than predicted number of customers decline to continue purchasing products from us; |
17
| • | we may have to delay or not proceed with a substantial acquisition if we cannot obtain the necessary funding to complete the acquisition in a timely manner; | ||
| • | we may significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition or assume existing debt of an acquired company, which, among other things, may result in a downgrade of our credit ratings; | ||
| • | we may have multiple and overlapping product lines that may be offered, priced and supported differently, which could cause our gross profit margins to decline; | ||
| • | our relationship with current and new employees, customers and suppliers could be impaired; | ||
| • | our due diligence process may fail to identify risks that could negatively impact our financial condition; | ||
| • | we may lose anticipated tax benefits or have additional legal or tax exposures if we have prematurely or improperly combined entities; | ||
| • | we may face contingencies related to product liability, intellectual property, financial disclosures, tax positions and accounting practices or internal controls; | ||
| • | the acquisition may result in litigation from terminated employees or third parties; | ||
| • | our management’s attention may be diverted by transition or integration issues; and | ||
| • | we may be unable to obtain timely approvals from governmental authorities under competition and antitrust laws. |
These factors could have a material adverse effect on our business, results of operations,
financial condition or cash flows, particularly in the case of a larger acquisition or a number of
acquisitions.
As a decentralized business, we depend on both senior management and our key operating employees;
if we are unable to attract and retain these individuals, our ability to operate and grow our
business may be adversely affected.
Because of our decentralized operating style, we depend on the efforts of our senior
management, including our chairman and chief executive officer, David H. Hannah, our president and
chief operating officer, Gregg J. Mollins, and our executive vice president and chief financial
officer, Karla Lewis, as well as our key operating employees. We may not be able to retain these
individuals or attract and retain additional qualified personnel when needed. We do not have
employment agreements with any of our corporate officers or most of our key employees, so they may
have less of an incentive to stay with us when presented with alternative employment opportunities.
The compensation of our officers and key employees is heavily dependent on our profitability and in
times of reduced profitability this may cause our employees to seek employment opportunities that
provide a more stable compensation structure. In addition, our senior management and key operating
employees hold stock options that have vested and may also hold common stock in our employee stock
ownership plan. These individuals may, therefore, be more likely to leave us if the shares of our
common stock significantly appreciate in value. The loss of any key officer or employee will
require remaining officers and employees to direct immediate and substantial attention to seeking a
replacement. Our inability to retain members of our senior management or key operating employees or
to find adequate replacements for any departing key officer or employee on a timely basis could
adversely affect our ability to operate and grow our business.
We are subject to various environmental, employee safety and health and customs and export laws and
regulations, which could subject us to significant liabilities and compliance expenditures.
We are subject to various foreign, federal, state and local environmental laws and regulations
concerning air emissions, wastewater discharges, underground storage tanks and solid and hazardous
waste disposal at or from our facilities. Our operations are also subject to various employee
safety and health laws and regulations, including those concerning occupational injury and illness,
employee exposure to hazardous materials and employee complaints. We are also subject to customs
and exporting laws and regulations for international shipment of our products. Environmental,
employee safety and health and customs and export laws and regulations are comprehensive, complex
and frequently changing. Some of these laws and regulations are subject to varying and conflicting
interpretations. We may be subject from time to time to administrative and/or judicial proceedings
or investigations brought by private parties or governmental agencies with respect to environmental
matters, employee safety and health issues or customs and exporting issues. Proceedings and
investigations with respect to environmental matters, any employee safety and health issues or
customs and exporting issues could result in substantial costs to us, divert our
18
management’s attention and result in significant liabilities, fines or the suspension or
interruption of our service center activities. Some of our current properties are located in
industrial areas with histories of heavy industrial use. The location of these properties may
require us to incur environmental expenditures and to establish accruals for environmental
liabilities that arise from causes other than our operations. In addition, we are currently
investigating and remediating contamination in connection with certain properties we have acquired.
Our international presence has grown, so the risk of incurring liabilities or fines resulting from
non-compliance with customs or export laws has increased. We are currently investigating and
remediating potential violations, most of which occurred at companies prior to Reliance acquiring
them; however, we may incur fines or penalties for any such violations. Future events, such as
changes in existing laws and regulations or their enforcement, new laws and regulations or the
discovery of conditions not currently known to us, could result in material environmental or export
compliance or remedial liabilities and costs, constrain our operations or make such operations more
costly.
Proposed legislation aimed at regulating and taxing carbon emissions may impact both the prices we
pay for materials and the volume of business from our customers involved in fossil fuel
exploration.
We purchase large quantities of metal from mills whose production costs may increase because
of proposed increases in taxation on carbon emissions as a byproduct of the milling process. Such
regulation, if passed, may consequently result in higher prices charged to us by the mills for most
every type of metal that we sell. The price that we pay for utilities such as electricity to run
our warehouse equipment and fuel to run our delivery trucks and forklifts may rise as well due to
increased taxation on the companies who produce and supply these commodities. We may not be able
to fully pass on these costs to our customers without a resulting decline in order volumes, which
may adversely impact our profits.
Carbon-related regulation may also negatively impact domestic exploration efforts. Should such
a reduction in domestic exploration occur, we would expect to see a resulting slow down in sales to
our energy end market in general, thus negatively impacting our revenues, gross profit and net
income.
Our operating results have fluctuated, and are expected to continue fluctuating, depending on the
season.
Many of our customers are in seasonal businesses, including customers in the construction and
related industries. In addition, our revenues in the months of July, November and December
traditionally have been lower than in other months because of increased vacation days and holiday
closures for various customers. Consequently, you should not rely on our results of operations
during any particular quarter as an indication of our results for a full year or any other quarter.
Ongoing tax audits may result in additional taxes.
Reliance and our subsidiaries are undergoing various tax audits. These tax audits could result
in additional taxes, plus interest and penalties being assessed against Reliance or any of our
subsidiaries and the amounts assessed could be material.
Damage to our computer infrastructure and software systems could harm our business.
The unavailability of any of our primary information management systems for any significant
period of time could have an adverse effect on our operations. In particular, our ability to
deliver products to our customers when needed, collect our receivables and manage inventory levels
successfully largely depend on the efficient operation of our computer hardware and software
systems. Through information management systems, we provide inventory availability to our sales and
operating personnel, improve customer service through better order and product reference data and
monitor operating results. Difficulties associated with upgrades, installations of major software
or hardware, and integration with new systems could lead to business interruptions that could harm
our reputation, increase our operating costs and decrease our profitability. In addition, these
systems are vulnerable to, among other things, damage or interruption from power loss, computer
system and network failures, loss of tele-communications services, operator negligence, physical
and electronic loss of data, or security breaches and computer viruses.
We have contracted with third-party service providers that provide us with backup systems in
the event that our major information management systems are damaged. The backup facilities and
other protective measures we take could prove to be inadequate.
The value of your investment may be subject to sudden decreases due to the potential volatility of
the price of our common stock.
The market price of our common stock may be highly volatile and subject to wide fluctuations
in response to various factors, including variations in our quarterly results of operations and our
leverage position, as well as a general economic downturn.
19
During the last two years our stock price was extremely volatile reaching an all-time high of
$78 per share in July 2008 and then declining to $13 per share in November 2008. Other factors may
include matters discussed in other risk factors and the following factors:
| • | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors or changes in estimates that we provide in our quarterly earnings release and conference call; | ||
| • | developments affecting our Company, our customers or our suppliers; | ||
| • | changes in the legal or regulatory environment affecting our business; | ||
| • | press releases, earnings releases or publicity relating to us or our competitors or relating to trends in the metals service center industry; | ||
| • | inability to meet securities analysts’ and investors’ quarterly or annual estimates or targets of our performance; | ||
| • | a decline in our credit rating by the rating agencies; | ||
| • | the operating and stock performance of other companies that investors may deem comparable; | ||
| • | sales of our common stock by large shareholders or insiders; | ||
| • | general domestic or international economic, market and political conditions. |
These factors may adversely affect the trading price of our common stock, regardless of our
actual operating performance. In addition, stock markets from time to time experience extreme
price and volume fluctuations that may be unrelated or disproportionate to the operating
performance of companies. In the past, some shareholders have brought securities class action
lawsuits against companies following periods of volatility in the market price of their securities.
We may in the future be the target of similar litigation. Securities litigation, regardless of
whether our defense is ultimately successful, could result in substantial costs and divert
management’s attention and resources.
The volatility of the market could result in a material impairment of goodwill.
We review the recoverability of goodwill annually or whenever significant events or changes
occur which might impair the recovery of recorded costs, making certain assumptions regarding
future operating performance. We test for impairment of goodwill by calculating the fair value of
a reporting unit using the discounted cash flow method. Under this method, the fair value of each
reporting unit is estimated based on expected future economic benefits discounted to a present
value at a rate of return commensurate with the risk associated with the investment. Projected
cash flows are discounted to present value using an estimated weighted average cost of capital,
which considers both returns to equity and debt investors. Significant changes in any one of the
assumptions made as part of our analysis, which could occur as a result of actual events, or
further declines in the market conditions for our products or our common stock could significantly
impact our impairment analysis. An impairment charge, if incurred, could be material.
Principal shareholders who own a significant number of shares may have interests that conflict with
yours.
Periodically, we have one or more shareholders that control 5% or more of the outstanding
shares of our common stock. Individually or together, they may have the ability to significantly
influence matters requiring shareholder approval. In deciding how to vote on such matters, these
shareholders may be influenced by interests that conflict with yours.
We have implemented anti-takeover provisions that may adversely impact your rights as a holder of
Reliance common stock.
Certain provisions in our articles of incorporation and our bylaws could delay, defer or
prevent a third party from acquiring Reliance, despite the possible benefit to our shareholders, or
otherwise adversely affect the price of our common stock and the rights of our shareholders. We are
authorized to issue 5,000,000 shares of preferred stock, no par value, with the rights,
preferences, privileges and restrictions of such stock to be determined by our board of directors,
without a vote of the holders of common stock. Our board of directors could grant rights to holders
of preferred stock to reduce the attractiveness of Reliance as a potential takeover target or make
the removal of management more difficult. In addition, our restated articles of incorporation and
amended and restated bylaws (1) impose advance notice requirements for shareholder proposals and
nominations of directors
20
to be considered at shareholder meetings and (2) establish a staggered or classified board of
directors. These provisions may discourage potential takeover attempts, discourage bids for our
common stock at a premium over market price or adversely affect the market price of, and the voting
and other rights of the holders of, our common stock. These provisions could also discourage proxy
contests and make it more difficult for you and other shareholders to elect directors other than
the candidates nominated by our board of directors. In addition, our credit facility and the
provisions of our senior private notes and debt securities contain limitations on our ability to
enter into change of control transactions.
Risks Related to our Debt Securities
Because our senior debt securities and the related guarantees are not secured and are effectively
subordinated to the rights of secured creditors, the debt securities and the related guarantees
will be subject to the prior claims of any secured creditors, and if a default occurs, we may not
have sufficient funds to fulfill our obligations under the debt securities or the related
guarantees.
The notes and the guarantees are unsecured obligations, ranking equally with other senior
unsecured indebtedness. The indenture governing the notes, as well as our credit facility and
private placement notes, permit us and the subsidiary guarantors to incur additional secured or
unsecured debt under specified circumstances. If we or the subsidiary guarantors incur additional
secured debt, our assets and the assets of the subsidiary guarantors securing such debt will be
subject to prior claims by our secured creditors. In the event of bankruptcy, insolvency,
liquidation, reorganization, dissolution or other winding up of either Reliance or any of the
subsidiary guarantors, assets that secure debt will be available to pay obligations on the notes
and guarantees only after all debt secured by those assets has been repaid in full. Holders of the
notes will participate in any remaining assets ratably with all of the respective unsecured and
unsubordinated creditors of Reliance and the subsidiary guarantors, including trade creditors. If
Reliance or any of the subsidiary guarantors incurs any additional unsecured obligations that rank
equally with the notes, including trade payables, the holders of those obligations will be entitled
to share ratably with the holders of the notes in any proceeds distributed as a result of
bankruptcy, insolvency, liquidation, reorganization, dissolution or other winding up. If we do not
have sufficient assets to pay all creditors of these entities, a portion of the notes outstanding
would remain unpaid.
The guarantees may be unenforceable due to fraudulent conveyance statutes and, accordingly, the
holders of our debt securities may not have a claim against the subsidiary guarantors.
The obligations of each subsidiary guarantor under its guarantee will be limited as necessary
to prevent that guarantee from constituting a fraudulent conveyance or fraudulent transfer under
applicable law. However, a court in some jurisdictions could, under fraudulent conveyance laws,
further subordinate or void the guarantee of any subsidiary guarantor if it found that such
guarantee was incurred with actual intent to hinder, delay or defraud creditors, or such subsidiary
guarantor did not receive fair consideration or reasonably equivalent value for the guarantee and
that the subsidiary guarantor was any of the following: insolvent or rendered insolvent because of
the guarantee, engaged in a business or transaction for which its remaining assets constituted
unreasonably small capital, or intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts at maturity.
If a court were to void the guarantee of a subsidiary guarantor as the result of a fraudulent
conveyance, or hold it unenforceable for any other reason, holders of the notes would cease to have
a claim against that subsidiary guarantor on its guarantee and would be creditors solely of
Reliance and any other subsidiary guarantor whose guarantee is not voided or held to be
unenforceable.
The guarantees will be released under certain circumstances.
The debt securities will be guaranteed by any subsidiary guarantor for so long as such
subsidiary guarantor is a borrower or a guarantor of obligations under our credit agreement and our
private notes. In the event that, for any reason, the obligations of any subsidiary guarantor
terminate as a borrower or guarantor under our credit agreement and our private notes, that
subsidiary guarantor will be deemed released from all of its obligations under the indenture and
its guarantee of the notes will terminate. A subsidiary guarantor’s guarantee will also terminate
and such subsidiary guarantor will be deemed released from all of its obligations under the
indenture with respect to the notes of a series upon legal defeasance of such series or
satisfaction and discharge of the indenture as it relates to such series. A subsidiary guarantor’s
guarantee will also terminate and such subsidiary guarantor will be deemed released from all of its
obligations under the indenture with respect to each series of notes in connection with any sale or
other disposition by Reliance of all of the capital stock of that subsidiary guarantor (including
by way of merger or consolidation) or other transaction such that after giving effect to such
transaction such subsidiary guarantor is no longer a domestic subsidiary of Reliance. If the
obligations of any subsidiary guarantor as a guarantor terminate or are released, the risks
applicable to our subsidiaries that are not guarantors will also be applicable to such subsidiary
guarantor.
21
We depend on the receipt of dividends or other intercompany transfers from our subsidiaries to meet
our obligations under the notes. Claims of creditors of our subsidiaries may have priority over
your claims with respect to the assets and earnings of our subsidiaries.
We conduct a substantial portion of our operations through our subsidiaries. We will therefore
be dependent upon dividends or other intercompany transfers of funds from our subsidiaries in order
to meet our obligations under the notes and to meet our other obligations. Generally, creditors of
our subsidiaries will have claims to the assets and earnings of our subsidiaries that are superior
to the claims of our creditors, except to the extent the claims of our creditors are guaranteed by
our subsidiaries. All of our wholly-owned domestic subsidiaries, which constitute the substantial
majority of our subsidiaries, guarantee the notes. As of December 31, 2009, Reliance and the
subsidiary guarantors accounted for approximately $4.03 billion, or 93%, of our total consolidated
assets. Reliance and the subsidiary guarantors accounted for approximately $5.10 billion, or 96%,
of our total consolidated revenues for the year ended December 31, 2009. If Reliance expands its
international presence at a greater pace than it expands its U.S. presence, a smaller percentage of
its consolidated assets may be subject to the guarantee obligations.
In the event of the bankruptcy, insolvency, liquidation, reorganization, dissolution or other
winding up of Reliance, the holders of our notes may not receive any amounts with respect to the
notes until after the payment in full of the claims of creditors of our subsidiaries that are not
subsidiary guarantors.
We are permitted to incur more debt, which may intensify the risks associated with our current
leverage, including the risk that we will be unable to service our debt.
Subject to certain limitations, our existing credit facility and private notes permit us to
incur additional debt. The indenture governing the notes does not limit the amount of additional
debt that we may incur. If we incur additional debt, the risks associated with our leverage,
including the risk that we will be unable to service our debt, will increase.
The provisions in the indenture that governs the notes relating to change of control transactions
will not necessarily protect the holders of our notes in the event of a highly leveraged
transaction.
The provisions contained in the indenture will not necessarily afford the holders of our notes
protection in the event of a highly leveraged transaction that may adversely affect them, including
a reorganization, restructuring, merger or other similar transaction involving Reliance. These
transactions may not involve a change in voting power or beneficial ownership or, even if they do,
may not involve a change of the magnitude required under the definition of change of control
repurchase event in the indenture to trigger these provisions, notably, that the transactions are
accompanied or followed within 60 days by a downgrade in the rating of the notes. Except in the
event of a change of control, the indenture does not contain provisions that permit the holders of
the notes to require us to repurchase the notes in the event of a takeover, recapitalization or
similar transaction.
Reliance may not be able to repurchase all of the notes upon a change of control repurchase event.
We will be required to offer to repurchase certain outstanding senior notes upon the
occurrence of a change of control repurchase event as defined in the indenture dated November 20,
2006 (see Exhibit 4.01 included in this Annual Report on Form 10-K). We may not have sufficient
funds to repurchase the notes in cash at such time or have the ability to arrange necessary
financing on acceptable terms. In addition, our ability to repurchase the notes for cash may be
limited by law or the terms of other agreements relating to our indebtedness outstanding at the
time. Under the terms of our credit facility, we are prohibited from repurchasing the notes if we
are in default under such credit facility.
Ratings of our notes may change and affect the market price and marketability of the notes.
The notes are rated by Moody’s Investors Service Inc. and Standard & Poor’s. Such ratings are
limited in scope, and do not address all material risks relating to an investment in the notes, but
rather reflect only the view of each rating agency at the time the rating is issued and
subsequently updated or affirmed. An explanation of the significance of such rating may be obtained
from such rating agency. There is no assurance that our current credit ratings will remain in
effect for any given period of time or that such ratings will not be lowered, suspended or
withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so
warrant. It is also possible that such ratings may be lowered in connection with future events,
such as future acquisitions. Holders of our notes have no recourse against us or any other parties
in the event of a change in or suspension or withdrawal of such ratings. Any lowering, suspension
or withdrawal of such ratings may have an adverse effect on the market price or marketability of
the notes. In addition, any decline in the ratings of the notes may make it more difficult for us
to raise capital on acceptable terms.
22
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2009, we maintained more than 200 metals service center processing and
distribution facilities in 38 states, and in Belgium, Canada, China, Mexico, Singapore, South Korea
and the United Kingdom, a sales office in France, and our corporate headquarters. We are in the
process of building additional facilities, including a metals service center in Malaysia that is
expected to begin operations in the 2010 second quarter. All of our service center facilities are
in good or excellent condition and are adequate for our existing operations. These facilities
generally operate at about 60% of capacity based upon a 24-hour seven-day week, with each location
averaging about two shifts operating at full capacity for a five-day work week. During 2009,
however, we had many employees working reduced hours or locations running at reduced shifts in
response to low demand levels, which lowered our capacity utilization to about 50%.
We lease 128 of our processing and distribution facilities with total square footage of
approximately 9.2 million. Total square footage on all company-owned properties is approximately
14.1 million. In addition, we lease our corporate headquarters in Los Angeles, California and
several of our subsidiaries lease other sales offices or non-operating locations. The leases
expire at various times through 2031 and the aggregate monthly rent amount is approximately $3.1
million.
Item 3. Legal Proceedings.
From time to time, we are named as a defendant in legal actions. Generally, these actions
arise out of our normal course of business. We are not a party to any pending legal proceedings
other than routine litigation incidental to the business. We expect that these matters will be
resolved without having a material adverse effect on our results of operations or financial
condition. We maintain liability insurance against risks arising out of our normal course of
business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year.
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and
was first traded on September 16, 1994. The following table sets forth the high and low reported
closing sale prices of the common stock on the NYSE Composite Tape for the stated calendar
quarters.
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter |
$ | 29.07 | $ | 18.72 | $ | 61.07 | $ | 44.50 | ||||||||
Second Quarter |
$ | 43.10 | $ | 28.05 | $ | 77.09 | $ | 59.78 | ||||||||
Third Quarter |
$ | 43.80 | $ | 33.71 | $ | 78.11 | $ | 36.26 | ||||||||
Fourth Quarter |
$ | 45.42 | $ | 36.42 | $ | 36.78 | $ | 12.63 | ||||||||
As of February 17, 2010, there were 283 record holders of our common stock. We have paid
quarterly cash dividends on our common stock for 50 years. In February 2007, the regular quarterly
dividend was increased 33% from $.06 to $.08 per share of common stock. In February 2008 the Board
again increased the quarterly dividend amount 25% from $.08 to $.10 per share of common stock. Our
Board of Directors has increased the quarterly dividend rate on a periodic basis. The Board may
reconsider or revise this policy from time to time based on conditions then existing, including our
earnings, cash flows, financial condition and capital requirements, or other factors the Board may
deem relevant. In September 2009, we amended our credit facility resulting in certain restrictions
on the amount of dividends that we may pay to our shareholders through June 30, 2010. We expect to
continue to declare and pay dividends in the future, if earnings are available to pay dividends,
but we also intend to continue to retain a portion of earnings for reinvestment in our operations
and expansion of our businesses. We cannot assure you that either cash or stock dividends will be
paid in the future or that, if paid, the dividends will be at the same amount or frequency as paid
in the past.
We had no repurchases of our common stock in 2009. In January 2008, we repurchased
approximately 2,443,500 shares of our common stock at an average cost per share of $46.97. Since
initiating the Stock Repurchase Plan in 1994 we have purchased approximately 15,200,000 shares at
an average cost of $18.41 per share. As of December 31, 2009 we had authorization to purchase an
additional 7,883,033 shares under our existing Repurchase Plan.
The private placement debt agreements for our senior notes and our syndicated credit facility
contain covenants which, among other things, require us to maintain a minimum net worth, which may
restrict our ability to pay dividends. Since our initial public offering in September 1994 through
2009, we have paid between 5% and 25% of earnings to our shareholders as dividends. The wide range
is due mainly to volatility of our earnings over this period more than volatility of our dividend
rate. In 2009, our dividend payments represented 20% of earnings due to the low earnings in 2009
as a result of the poor economic conditions.
The following table contains certain information with respect to our cash dividends declared
during the past two fiscal years:
| Date of Declaration | Record Date | Payment Date | Dividends | |||
10/21/09
|
12/4/09 | 1/6/10 | $.10 per share | |||
| 7/22/09 | 8/21/09 | 9/14/09 | $.10 per share | |||
| 4/21/09 | 6/1/09 | 6/22/09 | $.10 per share | |||
| 2/18/09 | 3/6/09 | 3/27/09 | $.10 per share | |||
| 10/15/08 | 12/5/08 | 1/5/09 | $.10 per share | |||
| 7/16/08 | 8/22/08 | 9/12/08 | $.10 per share | |||
| 4/16/08 | 6/2/08 | 6/23/08 | $.10 per share | |||
| 2/13/08 | 3/7/08 | 3/28/08 | $.10 per share |
Although we have not offered any securities for sale in the last three years, we have
issued restricted stock on exercise of stock options granted pursuant to the Directors’ Stock
Option Plan, as amended, which was approved by shareholders. Proceeds from the exercise of these
options were used for working capital. Shares of our common stock were issued only to
non-management directors in the following transactions exempt from registration under Sections 4(2)
and 4(6) of the Securities Act:
| Number of Shares | Exercise Price | Date of Exercise | ||
| 3,750 | $17.16 | 7/28/09 |
Restricted shares of common stock were also issued as bonuses under the Key-Man Incentive
Plan, which we have maintained since 1965. The recipients of the restricted stock are fully vested
in the shares on the date of the grant; however, they
24
are restricted from trading the shares for a period of two years from the date of the grant.
There were no proceeds received from the restricted stock granted under the Key-Man Incentive Plan.
Shares of our common stock were issued only to a limited number of key employees in the following
transactions exempt from registration under Sections 4(2) and 4(6) of the Securities Act:
| Number of Shares | Market Value | Date of Grant | ||
| 10,360 | $24.86 | 2/23/09 | ||
| 5,052 | $56.04 | 3/3/08 |
We also have securities authorized for issuance under our Amended and Restated Stock
Option and Restricted Stock Plan (the “2004 Plan”) and the EMJ incentive stock option plan (the
“EMJ Plan”). For a description of securities authorized for issuance under these equity
compensation plans and the Directors’ Stock Option Plan, see Note 10 to the consolidated financial
statements.
Stock Performance Graph
The following graph compares the performance of our Common Stock with that of the S&P 500, the
Russell 2000 and the peer group that we selected for the five-year period from December 31, 2004
through December 31, 2009. The comparison of total return assumes that a fixed investment of $100
was invested on December 31, 2004 in all common stock and assumes the reinvestment of dividends.
Since there is no nationally-recognized industry index consisting of metals service center
companies to be used as a peer group index, Reliance constructed its own peer group. As of
December 31, 2009, the peer group consisted of Olympic Steel Inc. and Gibraltar Industries, Inc.,
each of which has securities listed for trading on NASDAQ; A.M. Castle & Co. and Worthington
Industries, Inc., each of which has securities listed for trading on the New York Stock Exchange;
and Russell Metals Inc., which has securities listed for trading on the Toronto Stock Exchange
(collectively, “Peer Group”). The returns of each member of the peer group are weighted according
to that member’s stock market capitalization as of the period measured. The stock price performance
shown on the graph below is not necessarily indicative of future price performance.
Comparison of 5 Year Cumulative Total Return Among Reliance Steel & Aluminum Co., The S&P 500 Index,
The Russell 2000 Index, and a Peer Group
The Russell 2000 Index, and a Peer Group
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Reliance Steel & Aluminum Co. |
100.00 | 158.14 | 205.00 | 283.91 | 105.59 | 231.67 | ||||||||||||||||||
S&P 500 |
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
Russell 2000 |
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 | ||||||||||||||||||
Peer Group |
100.00 | 115.95 | 124.04 | 128.84 | 82.28 | 104.25 | ||||||||||||||||||
25
Item 6. Selected Financial Data.
We have derived the following selected summary consolidated financial and operating data for
each of the five years ended December 31, 2009 from our audited consolidated financial statements.
You should read the information below with our Consolidated Financial Statements, including the
notes related thereto, and Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
SELECTED CONSOLIDATED FINANCIAL DATA
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Net sales |
$ | 5,318,132 | $ | 8,718,844 | $ | 7,255,679 | $ | 5,742,608 | $ | 3,367,051 | ||||||||||
Cost of sales (exclusive of
depreciation and amortization expenses
included in operating expenses) |
3,918,611 | 6,556,748 | 5,418,161 | 4,231,386 | 2,449,000 | |||||||||||||||
Gross profit (1) |
1,399,521 | 2,162,096 | 1,837,518 | 1,511,222 | 918,051 | |||||||||||||||
Operating expenses (2) |
1,149,129 | 1,309,125 | 1,114,012 | 883,860 | 554,536 | |||||||||||||||
Operating income |
250,392 | 852,971 | 723,506 | 627,362 | 363,515 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest expense |
(67,523 | ) | (82,575 | ) | (78,710 | ) | (61,692 | ) | (25,222 | ) | ||||||||||
Other income (expense), net |
12,624 | (3,840 | ) | 9,931 | 5,768 | 3,671 | ||||||||||||||
Income before income taxes |
195,493 | 766,556 | 654,727 | 571,438 | 341,964 | |||||||||||||||
Provision for income taxes |
46,317 | 282,921 | 246,438 | 216,625 | 127,775 | |||||||||||||||
Net income |
149,176 | 483,635 | 408,289 | 354,813 | 214,189 | |||||||||||||||
Less: Net income attributable to
noncontrolling interests
(3) |
1,018 | 858 | 334 | 306 | 8,752 | |||||||||||||||
Net income attributable to Reliance |
$ | 148,158 | $ | 482,777 | $ | 407,955 | $ | 354,507 | $ | 205,437 | ||||||||||
Earnings per Share: |
||||||||||||||||||||
Net income per share attributable to
Reliance shareholders — diluted
(4) |
$ | 2.01 | $ | 6.56 | $ | 5.36 | $ | 4.82 | $ | 3.10 | ||||||||||
Net income per share attributable to
Reliance shareholders — basic
(4) |
$ | 2.02 | $ | 6.60 | $ | 5.39 | $ | 4.85 | $ | 3.12 | ||||||||||
Weighted average common shares
outstanding — diluted (4) |
73,702 | 73,598 | 76,065 | 73,600 | 66,195 | |||||||||||||||
Weighted average common shares
outstanding — basic (4) |
73,446 | 73,102 | 75,623 | 73,134 | 65,870 | |||||||||||||||
Other Data: |
||||||||||||||||||||
Cash flow from operations |
$ | 942,996 | $ | 664,684 | $ | 638,964 | $ | 190,964 | $ | 272,219 | ||||||||||
Capital expenditures |
69,901 | 151,890 | 124,127 | 108,742 | 53,740 | |||||||||||||||
Cash dividends per share (4) |
.40 | .40 | .32 | .22 | .19 | |||||||||||||||
Balance Sheet Data (December 31): |
||||||||||||||||||||
Working capital |
$ | 973,335 | $ | 1,652,207 | $ | 1,121,539 | $ | 1,124,650 | $ | 513,529 | ||||||||||
Total assets |
4,306,777 | 5,195,485 | 3,983,477 | 3,614,173 | 1,769,070 | |||||||||||||||
Long-term debt (5) |
852,557 | 1,675,565 | 1,013,260 | 1,088,051 | 306,790 | |||||||||||||||
Reliance shareholders’ equity |
2,606,432 | 2,431,436 | 2,106,249 | 1,746,398 | 1,029,865 | |||||||||||||||
| (1) | Gross profit, calculated as Net sales less Cost of sales, is a non-GAAP financial measure as it excludes depreciation and amortization expense associated with the corresponding sales. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first-stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, are not significant and are excluded from our Cost of sales. Therefore, our Cost of sales is primarily comprised of the cost of the material we sell. The Company uses Gross profit as shown above as a measure of operating performance. Gross profit is an important operating and financial measure, as fluctuations in Gross profit can have a significant impact on our earnings. Gross profit, as presented, is not necessarily comparable with similarly titled measures for other companies. | |
| (2) | Operating expenses include warehouse, delivery, selling, general and administrative expenses, depreciation expense and amortization expense. | |
| (3) | The portion of American Steel’s earnings attributable to our former 49.5% partner is included in noncontrolling interest for the year ended December 31, 2005. On January 3, 2006 we acquired our former partner’s interest, increasing our ownership to 100%. | |
| (4) | All share information has been retrospectively adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend that was effective July 19, 2006. | |
| (5) | Includes the long-term portion of capital lease obligations. |
26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
2009 marked Reliance’s seventieth year as a metals service center company and fifteenth year
as an NYSE-listed public company. 2009 also marked what we consider to be the most difficult
operating environment that our company has ever experienced and also, we believe, the worst in our
industry for at least the last seventy years. Typically we focus on maximizing profitability of our
existing businesses and continued profitable growth through both acquisitions and internal
initiatives. During 2009 we shifted our focus to maximizing liquidity, mainly by reducing inventory
levels and using the cash to pay down debt. In addition to significant uncertainty regarding the
extent of the downturn on our business levels in 2009, financial markets were unstable creating
uncertainty as to continued credit availability for us, our customers and our suppliers. We were
successful in our efforts as we generated record cash flow from operations of $943 million in 2009
and paid down approximately $830 million of debt, providing us with ample liquidity not only to
survive the recession, but to emerge as a financially stronger and leaner company. In 2009 we once
again outperformed our peers with pre-tax income of $195 million.
Due to our focus on debt reduction, we suspended acquisition activity during 2009. However, we
do not believe that we missed any opportunities that fit our acquisition criteria during this
period and we are now well positioned to execute our acquisition strategy as opportunities arise.
We believe there may be opportunities to acquire companies in our industry that are attractive to
us beginning in the second half of 2010. We continued our internal growth activities during 2009
with $70 million of capital expenditures that included opening service centers in new geographic
areas as well as expanding or enhancing existing facilities and equipment. We also took advantage
of opportunities to expand our customer base arising from certain actions of other service centers
in 2009.
The U.S. economy technically entered an economic recession in December 2007, which quickly
spread to the global economy. Our 2008 business activity and profitability continued at record
levels until November 2008, which was later than many other companies felt the severe impact of the
downturn. We believe our strategic product, geographic and customer diversity somewhat delayed the
effects of the downturn on our financial results, especially with our minimal exposure to the auto
and residential construction markets. However, we were not immune. Significant and rapid declines
in both prices and demand for our products began in the 2008 fourth quarter and continued through
the 2009 first half. We were deeply affected in the 2009 second quarter mainly due to steep price
reductions for carbon steel products sold primarily to the non-residential construction market,
which represents about one-third of our business. Further, we had completed our largest acquisition
to-date (based on transaction value) on August 1, 2008. This acquisition increased our debt by $1.1
billion and also intensified the effect of the unprecedented declines in inventory values and
demand as our newly-acquired subsidiary historically carried higher levels of inventory than
Reliance, mainly of carbon steel products.
Steel producers reacted to the downturn in demand by reducing production capacity to less than
50% in order to somewhat maintain pricing levels. Although prices for most metal products, and
especially carbon steel products, declined significantly during this period, without the discipline
exercised by the mills we believe prices may have fallen much lower than they did, resulting in an
even greater negative impact on the financial results of Reliance and the metals industry in
general. Domestic pricing levels were also supported because of relatively low imports into the
U.S. during 2009 due to the weak dollar.
Service centers, including Reliance, went into a destocking mode, trying to convert inventory
to cash. Because demand was falling as fast as pricing, service centers were chasing the price
down, sometimes selling product at a loss in a very competitive market. This significantly reduced
our gross profit margins. Both demand and pricing began to stabilize somewhat, albeit at low
levels, late in the 2009 second quarter. In the 2009 third quarter, mill prices began to increase
and we began purchasing more metal from mills as our inventory levels better matched our shipment
levels. This better aligned our inventory costs with current replacement cost, allowing us to focus
on improving our gross profit margins rather than chasing business to maximize cash flow. The third
quarter carbon steel price increases were mainly driven by improved auto demand, which caused some
domestic mills to restart production that then increased supply and pressured pricing in the 2009
fourth quarter. However, raw material costs then began to increase and the mills announced price
increases for the 2010 first quarter, which helped to maintain our selling prices and improve our
gross profit margins in the fourth quarter.
27
Beginning in the 2008 fourth quarter, we began to aggressively reduce our operating costs. Our
most significant operating expense is personnel costs and in reaction to reduced activity levels we
have reduced our workforce by 22% since September 2008. We believe that we are quick to react to
changes in business conditions and that our response to such changes allows us to operate
efficiently and profitably even in less favorable economies.
We generated record cash flow from operations of $943 million in 2009. As of December 31,
2009, our net debt-to-total capital ratio was down to 25.6% from 41.4% at December 31, 2008. In
2009 we repaid $831.2 million of debt and had only $115 million borrowed on our $1.1 billion credit
facility at December 31, 2009. In September 2009 we amended our credit facility mainly to provide
relief under our interest coverage ratio covenant and also extended $1.02 billion of our
commitments to November 2012 from November 2011. From now through November 2012, we have $147.1
million of scheduled debt maturities. We expect to fund these obligations with our cash flow from
operations and availability on our credit facility.
We believe our consistent focus on cost controls and inventory turnover and our product,
customer and geographic diversification allowed us to weather the recent economic crisis better
than most of our competitors and that this will provide longer-term growth opportunities for us.
We expect to further grow the Company in 2010 both through accretive acquisitions, if
available, and internal growth opportunities that enhance our product, geographic and customer
diversity. We believe the somewhat improved business climate and credit markets should result in
acquisition opportunities that are attractive to us beginning later in the year. We will evaluate
these opportunities and pursue those that meet our disciplined acquisition criteria. Our 2010
capital expenditure budget is $140 million, a good portion of which will be invested in new or
expanded facilities and state-of-the art equipment that will allow us to continue to provide
superior customer service and the highest quality of processed metals to our existing customers as
well as to expand our market share.
Demand for us has improved in January and February 2010 over the second half of 2009 and we
expect that demand overall will recover slowly as the year progresses. We expect prices to remain
at or near current levels at least through the 2010 first quarter and believe that there must be a
meaningful improvement in demand before we will see any material improvements in pricing. With
demand and pricing at relatively stable levels, we will again focus on servicing our
customers in a manner that allows us to maximize profitability. We expect our gross profit margins
to be in a range of 25% to 27%, consistent with our historical results over the past ten years.
Further declines in demand or pricing for our products could further reduce our gross profit
margins.
Customer demand can have a significant impact on our results of operations. When volume
increases our revenue dollars increase, which then contributes to increased gross profit dollars.
Variable costs may also increase with volume including increases in our warehouse, delivery,
selling, general and administrative expenses. Conversely, when volume declines, we typically
produce fewer revenue dollars, which can reduce our gross profit dollars. We can reduce certain
variable expenses when volumes decline, but we cannot easily reduce our fixed costs.
Pricing for our products can have a more significant impact on our results of operations than
customer demand levels. As pricing increases, so do our revenue dollars. Our pricing usually
increases when the cost of our materials increases. If prices increase and we maintain the same
gross profit percentage, we generate higher levels of gross profit and pre-tax income dollars for
the same operational efforts. Conversely, if pricing declines, we will typically generate lower
levels of gross profit and pre-tax income dollars. Because changes in pricing do not require us to
adjust our expense structure other than for profit-based compensation, the impact on our results of
operations from changes in pricing is typically much greater than the effect of volume changes.
In addition, when volume or pricing increases, our working capital requirements typically
increase, which may require us to increase our outstanding debt. This could increase our interest
expense. When our customer demand falls, we can typically generate stronger levels of cash flow
from operations as our working capital needs decrease.
2008 Acquisitions
On September 17, 2008, through our newly-formed Singapore company Reliance Metalcenter Asia
Pacific, Pte, Ltd. (“RMAP”), we acquired the assets, including the inventory, machinery, and
equipment, of the Singapore operation of HLN Metal Centre Pte. Ltd. RMAP focuses primarily on
supplying metal to the electronics, semiconductor, and solar energy markets. We entered this market
primarily to support existing U.S. customers that moved to or expanded their operations in Asia.
Net sales of RMAP for the year ended December 31, 2009 and during the period from September 17,
2008 through December 31, 2008 were approximately $3.0 million and $1.0 million, respectively.
28
On August 1, 2008, we acquired all of the outstanding capital stock of PNA Group Holding
Corporation, a Delaware corporation (“PNA”), for a total transaction value of approximately $1.10
billion. We funded the acquisition with proceeds from a new $500 million senior unsecured term
loan and borrowings under our existing $1.1 billion syndicated revolving credit facility.
PNA’s subsidiaries include the operating entities Delta Steel, Inc., Feralloy Corporation,
Infra-Metals Co., Metals Supply Company, Ltd., Precision Flamecutting and Steel, Inc. and Sugar
Steel Corporation. We operate PNA as six distinct businesses that process and distribute primarily
carbon steel plate, bar, structural and flat-rolled products with 21 steel service centers
throughout the United States, as well as four joint ventures with six additional service centers in
the United States and Mexico. PNA’s net sales for the year ended December 31, 2009 and the five
months ended December 31, 2008 were approximately $1.01 billion and $887.6 million, respectively.
Effective April 1, 2008, through our subsidiary Service Steel Aerospace Corp., we acquired the
business of Dynamic Metals International, LLC (“Dynamic”) based in Bristol, Connecticut. Dynamic
was founded in 1999 and is a specialty metal distributor. Dynamic has been merged into and
currently operates as a division of Service Steel Aerospace Corp. headquartered in Tacoma,
Washington. This strategic acquisition expanded Reliance’s existing Service Steel Aerospace
specialty product offerings in the Northeastern area of the U.S. The all cash purchase price was
funded with borrowings on our revolving credit facility. Dynamic’s net sales for the year ended
December 31, 2009 and the nine months ended December 31, 2008 were approximately $9.6 million and
$8.7 million, respectively.
Internal Growth Activities
Despite the continued deterioration of the economy in 2009, we maintained our focus on organic
growth by opening new facilities, building or expanding existing facilities and adding processing
equipment with total capital expenditures of $69.9 million. We continued to expand our geographic
presence in 2009 with Phoenix Metals Company opening a new location in Richmond, Virginia, Earle M.
Jorgensen Company starting construction on a new facility in Nusajaya, Malaysia, which is scheduled
to open in 2010, and Chatham Steel Corporation buying land for a new facility to be built in
Ironton, Ohio. Operations in existing markets were also expanded during 2009, with PDM Steel
Service Centers moving into a newly constructed, larger and more efficient facility in Las Vegas,
Nevada and Precision Strip expanding and improving an existing facility in Kenton, Ohio. During
2009 we also consolidated and closed a few small operations that did not impact our ability to
service our customers. We expect to continue to expand our existing operations in 2010, with new
facilities planned, or currently under construction, for Yarde Metals in Limerick, Pennsylvania,
Reliance Metals Canada in Edmonton, Alberta, Canada, and Earle M. Jorgensen in Orlando, Florida and
Memphis, Tennessee. Our 2010 capital expenditure budget is $140 million.
Results of Operations
The following table sets forth certain income statement data for each of the three years ended
December 31 (dollars are shown in thousands and certain amounts may not calculate due to rounding):
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| $ | Net Sales | $ | Net Sales | $ | Net Sales | |||||||||||||||||||
Net sales |
$ | 5,318,132 | 100.0 | % | $ | 8,718,844 | 100.0 | % | $ | 7,255,679 | 100.0 | % | ||||||||||||
Cost of sales (exclusive
of depreciation and
amortization expense shown
below) |
3,918,611 | 73.7 | 6,556,748 | 75.2 | 5,418,161 | 74.7 | ||||||||||||||||||
Gross profit (1) |
1,399,521 | 26.3 | 2,162,096 | 24.8 | 1,837,518 | 25.3 | ||||||||||||||||||
S,G&A expenses |
1,030,245 | 19.4 | 1,211,201 | 13.9 | 1,034,139 | 14.3 | ||||||||||||||||||
Depreciation expense |
89,068 | 1.7 | 78,853 | 0.9 | 67,866 | 0.9 | ||||||||||||||||||
Amortization expense |
29,816 | 0.6 | 19,071 | 0.2 | 12,007 | 0.2 | ||||||||||||||||||
Operating income |
$ | 250,392 | 4.7 | % | $ | 852,971 | 9.8 | % | $ | 723,506 | 10.0 | % | ||||||||||||
| (1) | Gross profit, calculated as Net sales less Cost of sales, and Gross profit margin, calculated as Gross profit divided by Net sales, are non-GAAP financial measures as they exclude depreciation and amortization expense associated with the corresponding sales. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first-stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, are not significant and are excluded from our Cost of sales. Therefore, our Cost of sales is primarily comprised of the cost of the material we sell. The Company uses Gross profit and Gross profit margin as shown above as measures of operating performance. Gross profit and Gross profit margin are important operating and financial measures, as fluctuations in our Gross profit margin can have a significant impact on our earnings. Gross profit and Gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies. |
29
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Sales. Our 2009 annual consolidated sales of $5.32 billion were down 39.0% from 2008,
with a 15.4% decrease in tons sold and a 27.5% decrease in our average selling price per ton sold.
(Tons sold and average selling price per ton sold amounts exclude the toll processing sales of
Precision Strip, Inc. and Feralloy Corporation.) Our sales for 2009 and 2008 included $1.01 billion
and $887.6 million, respectively, from the PNA companies that we acquired on August 1, 2008.
Our average selling prices during 2009 have declined mainly because of the significant mill
price reductions for most products that we sell compared to 2008. Prices for most carbon steel
products were rising significantly during the first half of 2008 and reached record levels in July
2008. Subsequently, prices fell rapidly beginning in the 2008 fourth quarter and continued to
decline through the first half of 2009. In the 2009 second half there were modest increases in
mill prices for certain products. Our diverse product mix somewhat tempered the effect of the
carbon and stainless steel price declines, as aluminum products made up about 18.0% of our 2009
sales, and our average selling price for aluminum products was down only 11.5% in 2009 compared to
2008.
Same-store sales, which exclude the sales of our 2008 acquisitions, were $4.30 billion in
2009, down 45.1% from 2008, with a 31.9% decrease in our tons sold and an 18.8% decrease in our
average selling price per ton sold. The decline in our same-store tons sold was due to the lower
demand in all markets that we sell to, mainly because of the global economic recession that
significantly impacted our business activity beginning in the 2008 fourth quarter. According to the
Metals Service Center Institute, tons sold in 2009 were down approximately 37% for the metals
service center industry in North America compared to 2008.
The decline in the same-store average selling price per ton sold of 18.8% was lower than the
27.5% for the entire company mainly due to a change in our product mix towards a higher proportion
of carbon steel products resulting from the acquisition of PNA. Since carbon steel products
typically have lower selling prices than other products that we sell and were most impacted during
2009, they contributed to the relatively higher reduction in our consolidated average selling price
per ton sold.
Cost of Sales. Our total cost of sales decreased 40.2% in 2009 to $3.92 billion compared to
$6.56 billion in 2008. The decrease in cost of sales in 2009 compared to 2008 is due to decreases
in tons sold resulting from the global economic recession along with decreases in mill prices,
which impact our costs, that began in the 2008 fourth quarter and continued to decline through the
first half of 2009. Our cost per ton sold decreased 29.7%, relatively consistent with the
decrease in our average selling price per ton sold of 27.5%.
Also, 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 $305.0
million in 2009 compared to a charge, or expense of $109.2 million in 2008. The LIFO credit or
income that we recorded in 2009 was the result of significant decreases in our inventory costs at
year-end 2009 as compared to year-end 2008 levels, especially for carbon steel products. Our LIFO
reserve as of December 31, 2009 and 2008 was $82.8 million and $387.8 million, respectively.
Gross Profit. Total gross profit decreased 35.3% to $1.40 billion for 2009, compared to $2.16
billion in 2008. Our gross profit as a percentage of sales in 2009 was 26.3% compared to 24.8% in
2008.
During the first half of 2009, we were selling higher cost inventory into a declining price
market that significantly reduced our gross profit margins. Beginning in the 2009 third quarter,
mill prices began to increase and we began purchasing more metal from mills as our inventory levels
better matched our shipment levels. This better aligned our inventory costs with current
replacement costs resulting in improved gross profit margins. Our LIFO reserve adjustment was
income, or a credit, to cost of sales in 2009, compared to expense, or a charge, in 2008 which also
impacted our gross profit margins. See “Cost of Sales” above for discussion of our LIFO reserve
adjustments.
Our 2009 and 2008 gross profit margins were also impacted by our acquisition of PNA on August
1, 2008. The PNA companies have historically operated at lower gross profit levels than the
Reliance companies. The PNA companies have also historically carried higher levels of inventory
than the Reliance companies, which further pressured their gross profit margins during 2009 as it
took the PNA companies longer to reduce their high cost inventory and replace it with inventory at
current
replacement cost. We expect to improve the margins of the PNA companies to levels more
consistent with Reliance’s historical levels as demand and pricing improve.
30
Expenses. Warehouse, delivery, selling, general and administrative expenses (“S,G&A expenses”)
for 2009 decreased $181.0 million, or 14.9%, from 2008 and were 19.4% as a percentage of sales, up
from 13.9% in 2008. On a same-store basis, our 2009 expenses decreased $247.8 million, or 22.2%
from 2008 primarily due to lower compensation expense levels. Our 2009 expenses as a percent of
sales increased substantially because of our lower sales compared to 2008.
Our cost structure is highly variable, with about 60% of our expenses being personnel-related.
In 2009, we reduced our workforce by approximately 1,700 employees, or 16.2%, with most reductions
occurring in the first half of the year. Since September 30, 2008, we have reduced our workforce
by approximately 2,500 employees, or 21.9%. In addition to the headcount reductions, we have many
employees working reduced hours resulting in additional savings. Furthermore, throughout our
workforce, employees have a significant portion of compensation tied to profitability. Because of
the lower profitability levels in 2009 our compensation expense has declined. Additionally, our
2009 expenses include $18.8 million related to potentially uncollectible accounts receivable, an
increase of $12.7 million from 2008. In 2009, we wrote-off $19.6 million of customer receivables
as uncollectible, an increase of $11.6 million compared to 2008. Our allowance for uncollectible
accounts at December 31, 2009 was $21.3 million. Although we anticipate some further receivable
write-offs, we believe that our allowance is adequate to absorb any such losses.
Depreciation and amortization expense for 2009 of $118.9 million increased 21.4% from 2008.
The increase was mainly due to our 2008 acquisition of PNA and due to depreciation of our 2009
capital expenditures.
Operating Income. Operating income was $250.4 million in 2009, resulting in an operating
profit margin of 4.7%, compared to 2008 operating income of $853.0 million and an operating profit
margin of 9.8%. The lower sales amounts in 2009 have significantly reduced our operating income.
Other Income and Expense. Interest expense was $67.5 million, a decrease of $15.1 million from
$82.6 million in 2008. Although we significantly increased our borrowings for the $1.1 billion
purchase of PNA in August 2008, we were able to quickly reduce our debt level because of our strong
cash flows over the past fifteen months as we aggressively reduced our working capital levels.
Other income (expense), net was income of $12.6 million in 2009 compared to expense of $3.8 million
in 2008, a net increase in income of $16.5 million. Higher interest and dividend income on
company-owned life insurance policies as well as related policy redemption gains resulted in $8.8
million higher income from life-insurance policies in 2009 compared to 2008. Also, 2008 results
were impacted with foreign currency transaction losses of approximately $6.0 million.
Income Tax Rate. Our 2009 effective income tax rate was 23.7% compared to 36.9% for 2008. The
decrease in our effective rate is mainly due to the same type of permanent items having a much
greater impact on our effective rate in 2009 as a result of lower income levels and due to the
favorable resolution of certain tax matters in 2009.
Net Income. Net income attributable to Reliance in 2009 was $148.2 million compared to $482.8
million in 2008. The decrease was primarily due to the lower sales, gross profit and operating
income dollars generated as a result of the global economic recession.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net Sales. Our 2008 annual consolidated sales of $8.72 billion were our highest ever, up
20.2% from 2007, with an 11.8% increase in tons sold and an 8.2% increase in our average selling
price per ton sold. Our 2008 acquisition of PNA on August 1, 2008, contributed significantly to the
increase in our 2008 sales levels.
Same-store sales, which exclude the sales of our 2007 and 2008 acquisitions, were $7.21
billion in 2008, up 7.0% from 2007, with a 5.3% decrease in our tons sold and a 13.7% increase in
our average selling price per ton sold. For the first ten months of 2008 we experienced some
overall weakening in our end markets from 2007 levels but beginning in November the decline in
demand became much more dramatic as general economic conditions weakened across all of our end
markets.
As previously discussed, mill pricing for carbon steel products increased rapidly in the first
half of 2008, almost doubling during that period. We were able to pass these increases on to our
customers through increased selling prices during that time, causing a significant increase in our
2008 average selling price per ton sold over 2007 levels. Then, beginning in October 2008, carbon
steel prices came spiraling down, ending the year at a level approximately where they started the
year. The decreases occurred in a more compressed time period than the increases, which, when
combined with the demand deterioration, caused significant competitive pressures that caused us to
reduce our selling prices faster than our costs were declining.
31
In addition, our 2008 average selling price was impacted by the change in product mix
resulting from our acquisition of PNA, with carbon steel products representing 55.3% of our total
2008 sales, compared to 45.8% in 2007. Because carbon steel product prices are generally lower than
aluminum, alloy and stainless steel prices, the increase in our consolidated average selling price
in 2008 was substantially less than the increase in our same-store average selling price.
Cost of Sales. Our total cost of sales increased 21.0% in 2008 to $6.56 billion
compared to $5.42 billion in 2007. The increase in cost of sales in 2008 compared to 2007 is due to
the PNA acquisition in August 2008 and higher metal costs. Our cost per ton sold increased
approximately 8.6%, relatively consistent with the change in our average selling price per ton
sold.
Furthermore, our LIFO reserve adjustment was significantly larger in 2008 than in 2007. Our
year-end LIFO reserve adjustment resulted in expense of $109.2 million during 2008, compared to
$43.8 million in 2007. The significant increases in carbon steel prices in 2008 as compared to
year-end 2007 levels resulted in net LIFO expense for the year.
Gross Profit. Our total gross profit of $2.16 billion, up 17.7% from 2007, increased mainly
because of our higher net sales level in 2008. Our gross profit as a percentage of sales was 24.8%
in 2008, down from 25.3% in 2007. The mill pricing volatility experienced in 2008 was the primary
driver of our gross profit margins. During the first half of 2008 when the mills were announcing
significant price increases for carbon steel products, we were able to increase our selling prices
to our customers before we received the higher cost metal in our inventory, which allowed us to
expand our gross profit margins in that period. However, when the mills rapidly reduced prices
beginning in October 2008, we had to significantly reduce our selling prices to remain competitive.
Service centers went into an inventory destocking mode, attempting to clean out higher cost
inventory and replace it with lower cost inventory. Doing this in an environment of rapidly
deteriorating customer demand caused extreme competitive pressure in the industry that had a very
negative impact on our gross profit margin, especially as we were also in a destocking mode.
Our 2008 gross profit margin was also impacted by our acquisition of PNA on August 1st.
Excluding the PNA companies from our 2008 results would have resulted in a gross profit margin of
26.0%.
Expenses. S,G&A expenses for 2008 increased $177.1 million, or 17.1% from 2007 mainly due to
our 2007 and 2008 acquisitions and general cost increases. The expenses as a percent of sales in
2008 were 13.9%, lower than the 2007 period. The overall increase in average carbon steel pricing
in 2008 helped to lower the ratio of our expenses as a percent of sales. Also, the acquisition of
the PNA companies favorably impacted our SG&A expenses as a percentage of sales as they have
historically operated at lower operating expense levels than the Reliance companies. During the
2008 fourth quarter we reduced our workforce by about 7.0% in addition to other personnel cost
saving actions in reaction to the deteriorating business activity levels in our industry.
Depreciation expense increased $11.0 million in 2008 mainly because of our 2007 and 2008
acquisitions, along with depreciation expense of our 2008 capital expenditures. Amortization
expense increased $7.1 million, or 58.8%, because of the amortization of our intangibles from our
2007 and 2008 acquisitions.
Operating Income. Operating income was $853.0 million in 2008, resulting in an operating
profit margin of 9.8%, compared to 2007 operating income of $723.5 million and an operating profit
margin of 10.0%. The increased profit is mainly due to higher gross profit dollars resulting from
increased sales levels; however, our operating income margins deteriorated because of our lower
gross profit margins in 2008. Our operating income reflects the strong environment for pricing
that existed during most of 2008 and our ability to take advantage of this environment, along with
the effect of the deteriorating business climate in our 2008 fourth quarter results.
Other Income and Expense. Interest expense was $82.6 million in 2008 compared to $78.7
million in 2007. The increase is mainly due to borrowings to fund our $1.10 billion acquisition of
PNA on August 1, 2008 offset by lower interest rates during 2008.
Income Tax Rate. Our 2008 effective income tax rate was 36.9% compared to 37.7% for 2007.
The decrease in our effective rate was mainly due to a lower state rate because of the PNA
acquisition that shifted a portion of our taxable income to states with lower rates.
Net Income. Net income attributable to Reliance in 2008 was $482.8 million compared to $408.0
million during 2007. The increase was primarily due to higher gross profit and operating income
dollars generated from the higher commodity prices during 2008 as well as the impact of our 2008
acquisitions.
32
Liquidity and Capital Resources
Operating Activities
At December 31, 2009, our working capital was $973.3 million, down from $1.65 billion as of
December 31, 2008. In 2009, we continued to significantly reduce our working capital and generated
$943.0 million of cash flow from operations, compared to $664.7 million in 2008, with $549.3
million of this amount generated in the 2008 fourth quarter. In the environment of declining demand
and pricing that we experienced from November 2008 through most of 2009, working capital needs
decreased significantly. The majority of our $943.0 million of cash flow generated from operations
came from working capital reductions. Decreases of $332.2 million in our accounts receivable
balance and $869.6 million in our FIFO inventory level were the primary contributors to our record
cash flows from operations during 2009.
To manage our working capital, we focus on our days sales outstanding (“DSO”) to monitor
accounts receivable and on our inventory turnover rate to monitor our inventory levels, as
receivables and inventory are the two most significant elements of our working capital. As of
December 31, 2009, our DSO rate was approximately 42 days, unchanged from December 31, 2008. (We
calculate our DSO as an average of the most recent two-month period.) Although our DSO rate has
stayed relatively unchanged from last year, our accounts receivable balance has decreased
significantly from December 31, 2008 due to lower sales levels in 2009.
In response to the rapid decline in both demand and pricing, we focused on inventory reduction
with a decrease of $869.6 million, or 52%, in our FIFO inventory balance in 2009. However, our
shipment levels fell even more rapidly than we could reduce our inventory balance resulting in an
inventory turn rate during 2009 of about 3.7 times (or 3.2 months on hand; calculated on FIFO
inventory amounts), compared to our 2008 rate of 3.9 times (or 3.1 months on hand).
Our inventory turns were also impacted by our 2008 acquisition of PNA, as PNA historically
turned inventory at lower rates than Reliance. We expect those inventory turns to improve as we
continue to focus on those businesses, and as business conditions improve.
When commodity prices or demand begin to improve, we expect to finance increases in working
capital needs through operating cash flow or with borrowings on our revolving credit facility.
Investing Activities
Capital expenditures were $69.9 million in 2009 compared to $151.9 million during 2008.
Because of our focus on liquidity and our uncertainty as to 2009 business conditions, we reduced
our capital projects but still invested in growth initiatives to expand or relocate existing
facilities and to add or upgrade equipment in addition to meeting ongoing maintenance requirements.
Our 2010 capital expenditures are budgeted at approximately $140.0 million, which includes several
growth activities to enhance existing facilities and equipment and also includes purchases of
various existing leased facilities.
Financing Activities
Our strong cash flow from operations funded our reductions of outstanding debt of $831.2
million and dividends to our shareholders of $29.4 million in 2009. On February 17, 2010, our
Board of Directors declared the 2010 first quarter cash dividend of $.10 per share. We have paid
regular quarterly dividends to our shareholders for 50 consecutive years.
In May 2005, our Board of Directors amended and restated our stock repurchase program
authorizing the repurchase of up to an additional 12,000,000 shares of our common stock, of which
7,883,033 shares remain available for repurchase as of December 31, 2009. Repurchased shares are
treated as authorized but unissued shares. We did not repurchase any shares of our common stock in
2009. We repurchased approximately 2,443,500 and 1,673,467 shares of our common stock in 2008 and
2007, respectively, at an average cost of $46.97 and $49.10 per share, respectively. Since
initiating our Stock Repurchase Plan in 1994, we have repurchased approximately 15,200,000 shares
at an average cost of $18.41 per share. We believe such purchases, given appropriate
circumstances, enhance shareholder value and reflect our confidence in the long-term growth
potential of our company.
Liquidity
Our primary sources of liquidity are generally our internally generated funds from operations
and our revolving credit facility. Cash flow provided by operations was $943.0 million in 2009
compared to $664.7 million in 2008.
33
Our outstanding debt (including capital lease obligations) as of December 31, 2009 was $939.6
million, down from $1.77 billion as of December 31, 2008. On August 1, 2008, we increased our
borrowings by approximately $1.10 billion to finance the acquisition of PNA through cash
consideration and the related repayment or refinancing of PNA’s outstanding indebtedness. We funded
this by raising $500 million from a senior unsecured term loan and borrowings on our revolving
credit facility.
On September 28, 2009, we amended our $1.1 billion revolving credit facility to adjust certain
financial covenants. Our interest coverage ratio requirement was reduced to a minimum 2.0 times
from 3.0 times and our leverage ratio requirement was reduced to a maximum of 50% from a maximum of
60% until June 30, 2010, at which time these ratios adjust back to the pre-amendment levels. With
the amendment, our pricing was adjusted to market rates. Restrictions were placed on certain uses
of cash including cash used for acquisitions, dividends, investments and stock repurchases through
June 30, 2010. Additionally, with the amendment of our credit facility, we extended the maturity
date by one year from November 2011 to November 2012 for $1.02 billion of commitments. Concurrent
with the amendment and extension of our revolving credit facility, we also paid off the remaining
balance on our term loan of $443.8 million with $193.8 million of cash on hand and $250.0 million
of borrowings on our revolving credit facility. Over the past fifteen months, we have paid down
approximately $1.34 billion of debt with cash flow from operations resulting in a cash position of
approximately $43.0 million as of December 31, 2009. As of December 31, 2009, we had $115.0
million in outstanding borrowings on our $1.1 billion revolving credit facility.
Our net debt-to-total capital ratio was 25.6% as of December 31, 2009; down from our 2008
year-end rate of 41.4% (net debt-to-total capital is calculated as total debt, net of cash, divided
by Reliance shareholders’ equity plus total debt, net of cash).
On November 20, 2006 we entered into an indenture (the “Indenture”), for the issuance of $600
million of unsecured debt securities, which are guaranteed by all of our direct and indirect,
wholly-owned domestic subsidiaries and any entities that become such subsidiaries during the term
of the Indenture (collectively, the “Subsidiary Guarantors”). None of our foreign subsidiaries or
our non-wholly-owned domestic subsidiaries is a guarantor. The total debt issued was comprised of
two tranches, (a) $350 million aggregate principal amount of senior unsecured notes bearing
interest at the rate of 6.20% per annum, maturing on November 15, 2016 and (b) $250 million
aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per
annum, maturing on November 15, 2036. The notes are senior unsecured obligations and rank equally
with all of our other existing and future unsecured and unsubordinated debt obligations. In April
2007, these notes were exchanged for publicly traded notes registered with the Securities and
Exchange Commission.
At December 31, 2009, we also had $213.0 million of outstanding senior unsecured notes issued
in private placements of debt. The outstanding private placement notes bear interest at an average
fixed rate of 5.7% and have an average remaining life of 1.9 years, maturing from 2010 to 2013. In
early January 2009, $10.0 million of these notes matured and were paid off.
We also had two separate revolving credit facilities for operations in Canada with a combined
credit limit of CAD$35 million as of December 31, 2009. There were no borrowings outstanding on
these credit facilities as of December 31, 2009 and December 31, 2008. In January 2010, the credit
facilities were combined into one facility with a credit limit of CAD$5 million. Various other
separate revolving credit facilities are in place for our operations in Asia and for our operations
in the United Kingdom with total combined outstanding balances of $8.1 million and $7.4 million as
of December 31, 2009 and December 31, 2008, respectively.
Our $1.1 billion syndicated 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 December 31, 2009 was approximately 3.9 times compared to the debt
covenant minimum requirement of 2.0 times (interest coverage ratio is calculated as net income
attributable to Reliance plus interest expense and provision for income taxes and plus or minus any
non-operating non-recurring loss or gain, respectively, divided by interest expense). The leverage
ratio as of December 31, 2009 calculated in accordance with the terms of the credit agreement was
27.5% compared to the debt covenant maximum amount of 50% (leverage ratio is calculated as total
debt, inclusive of capital lease obligations and outstanding letters of credit, divided by Reliance
shareholders’ equity plus total debt). The minimum net worth requirement as of December 31, 2009
was $950.6 million compared to the Reliance shareholders’ equity balance of $2.61 billion.
Additionally, all of our wholly-owned domestic subsidiaries, which constitute the substantial
majority of our subsidiaries, guarantee the borrowings under the revolving credit facility, the
Indenture and the private placement notes. The subsidiary guarantors also guaranteed the borrowings
under the term loan prior to its repayment and termination. The subsidiary guarantors, together
with Reliance, are required collectively to account for at least 80% of the Company’s consolidated
EBITDA and 80% of consolidated tangible assets. Reliance and the subsidiary guarantors accounted
for approximately 100% of our total 2009 consolidated EBITDA and approximately 93% of total
consolidated tangible assets as of December 31, 2009. We were in compliance with all other debt
covenants at December 31, 2009.
34
We have $147.1 million of debt obligations coming due before our credit facility expires in
November 2012. We are comfortable 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
expenditures, growth and other needs. 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
borrowings under our revolving credit facility, subject to the restrictions on the use of cash
described above. If we were to pursue a significant acquisition that could not be funded under our
existing credit facility, we would consider using our equity as consideration or raising additional
funds from debt or equity markets.
Off-Balance-Sheet Arrangements
During 2009 and 2008, we did not have any off-balance sheet arrangements or relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or variable interest entities, which are typically established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
As of December 31, 2009 and 2008, we were contingently liable under standby letters of credit
in the aggregate amount of $50.5 million and $51.1 million, respectively. The letters of credit
related to insurance policies, construction projects, and outstanding bonds.
Contractual Obligations and Other Commitments
The following table summarizes our contractual cash obligations as of December 31, 2009.
Certain of these contractual obligations are reflected on our balance sheet, while others are
disclosed as future obligations under U.S. generally accepted accounting principles.
| Payments due by Year | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Long Term Debt Obligations |
$ | 937,684 | $ | 86,383 | $ | 175,701 | $ | 75,600 | $ | 600,000 | ||||||||||
Estimated interest on long-term debt (1) |
646,936 | 54,214 | 95,226 | 81,926 | 415,570 | |||||||||||||||
Capital Lease Obligations |
4,276 | 814 | 1,585 | 1,539 | 338 | |||||||||||||||
Operating Lease Obligations |
300,078 | 57,328 | 85,309 | 51,802 | 105,639 | |||||||||||||||
Purchase Obligations — Other (2) |
77,653 | 48,885 | 27,369 | 1,364 | 35 | |||||||||||||||
Other Long-Term Liabilities
Reflected on the Balance Sheet
under GAAP (3) |
70,741 | 9,526 | 12,573 | 10,998 | 37,644 | |||||||||||||||
Total |
$ | 2,037,368 | $ | 257,150 | $ | 397,763 | $ | 223,229 | $ | 1,159,226 | ||||||||||
| (1) | Interest is estimated using applicable rates as of December 31, 2009 for our outstanding fixed and variable rate debt based on their respective scheduled maturities. | |
| (2) | The majority of our inventory purchases are completed within 30 to 120 days and therefore are not included in this table except for certain purchases where we have significant lead times or corresponding long-term sales commitments, typically for aerospace materials. | |
| (3) | Includes the estimated benefit payments or contribution amounts for the Company’s post-retirement benefit plans for the next ten years. |
Contractual obligations for purchases of goods or services are defined as agreements that
are enforceable and legally binding on our Company and that specify all significant terms,
including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction. Our purchase orders are based on our current needs
and are typically fulfilled by our vendors within short time periods. In addition, some of our
purchase orders represent authorizations to purchase rather than binding agreements. We do not
have significant agreements for the purchase of goods specifying minimum quantities and set prices
that exceed our expected requirements for three months. Therefore, agreements for the purchase of
goods and services are not included in the table above except for certain purchases where we have
significant lead times or corresponding long-term sales commitments, typically for aerospace
materials.
35
The expected timing of payments of the obligations above is estimated based on current
information. Timing of payments and actual amounts paid may be different, depending on the time of
receipt of goods or services, or changes to agreed-upon amounts for some obligations.
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 may be in seasonal businesses, especially customers in the construction
industry. As a result of our geographic, product and customer diversity, however, our operations
have not shown any material seasonal trends. 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 holiday closures at some of our customers.
We cannot assure you that period-to-period fluctuations will not occur in the future. Furthermore,
the impact of the current economic recession was so significant on our business during 2009 that
our period-to-period fluctuations experienced throughout the year were not representative of
typical seasonal trends experienced in the past. Results of any one or more quarters are therefore
not necessarily indicative of annual results.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired,
amounted to $1.08 billion as of December 31, 2009, or approximately 25.1% of total assets or 41.5%
of Reliance shareholders’ equity. Goodwill and other intangible assets deemed to have indefinite
lives are not amortized but are subject to annual impairment tests. Other intangible assets with
finite useful lives continue to be amortized over their useful lives. We review the recoverability
of our long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
We review the recoverability of goodwill annually or whenever significant events or changes
occur which might impair the recovery of recorded costs, making certain assumptions regarding
future operating performance. We test for impairment of goodwill by calculating the fair value of
a reporting unit using the discounted cash flow method. Under this method, the fair value of each
reporting unit is estimated based on expected future economic benefits discounted to a present
value at a rate of return commensurate with the risk associated with the investment. Projected
cash flows are discounted to present value using an estimated weighted average cost of capital,
which considers both returns to equity and debt investors. We perform the required annual goodwill
impairment evaluation as of November 1 of each year. No impairment of goodwill was determined to
exist for the years ended December 31, 2009, 2008 or 2007.
Impairment assessment inherently involves judgment as to assumptions about expected future
cash flows and the impact of market conditions on those assumptions. Future events and the current
changing market conditions may impact our assumptions as to commodity prices, demand and future
growth rates or other factors that may result in changes in our estimates of future cash flows.
Although we believe the assumptions used in testing for impairment are reasonable, significant
changes in any one of our assumptions could produce a significantly different result.
Additionally, considerable declines in the market conditions for our products from current levels
as well as in the price of our common stock could also significantly impact our impairment
analysis. An impairment charge, if incurred, could be material.
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss
our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. When we prepare these consolidated financial statements, we are
required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Some of
our accounting policies require that we make subjective judgments, including estimates that involve
matters that are inherently uncertain. Our most critical accounting estimates include those
related to accounts receivable, inventories, income taxes, goodwill and intangible assets and
long-lived assets. We base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances, the results of which form
the basis for our judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Our actual results may differ from these estimates under
different assumptions or conditions.
36
We believe the following critical accounting estimates, as discussed with our Audit Committee,
affect our more significant judgments and estimates used in preparing our consolidated financial
statements. (See Note 1 of the Notes to Consolidated Financial Statements for our Summary of
Significant Accounting Policies.) There have been no material changes made to the critical
accounting estimates during the periods presented in the Consolidated Financial Statements. We
also have other policies that we consider key accounting policies, such as for revenue recognition,
however these policies do not require us to make subjective estimates or judgments.
Accounts Receivable
We maintain an allowance for doubtful accounts to reflect our estimate of the uncollectability
of accounts receivable based on an evaluation of specific potential customer risks. Assessments
are based on legal issues (such as bankruptcy status), our past collection history, and current
financial and credit agency reports along with current economic pressures impacting that
customer or industry. Accounts that we determine to be uncollectible are reserved for or
written off in the period in which the determination is made. Additional reserves are
maintained based on our historical and probable future bad debt experience. If the financial
condition of our customers were to deteriorate beyond our estimates, resulting in an impairment
of their ability to make payments, we might be required to increase our allowance for doubtful
accounts.
Inventories
A significant portion of our inventory is valued using the last-in, first-out (“LIFO”) method.
Under this method, older costs are included in inventory, which may be higher or lower than
current costs. This method of valuation is subject to year-to-year fluctuations in cost of
material sold, which is influenced by the inflation or deflation existing within the metals
industry as well as fluctuations in our product mix and on-hand inventory levels. At December
31, 2009 cost on the first-in, first-out (“FIFO”) method exceeds our LIFO value of inventories
by $82.8 million. The calculation of LIFO does not require us to make subjective estimates or
judgments, except at interim reporting periods. Furthermore, considering that our current
inventory values as reflected in our financial statements on a LIFO basis are below FIFO costs,
valuation of our inventories at the lower of cost or market is also not subject to significant
estimates or judgments.
However, we do maintain allowances for estimated obsolescence or unmarketable inventory to
reflect the difference between the cost of inventory and the estimated market value based on an
evaluation of slow moving products and current replacement costs. If actual market conditions
are less favorable than those anticipated by management, additional allowances may be required.
Income Taxes
We currently have significant deferred tax assets, which are subject to periodic recoverability
assessments. Realizing our deferred tax assets principally depends upon our achieving projected
future taxable income. We may change our judgments regarding future profitability due to future
market conditions and other factors. We may adjust our deferred tax asset balances if our
judgments change.
For information regarding our deferred tax assets and liabilities, provision for income taxes as
well as information regarding differences between our effective tax rate and statutory rates,
see Note 9 of the Notes to Consolidated Financial Statements. Our tax rate may be affected by
future acquisitions, changes in the geographic composition of our income from operations,
changes in our estimates of credits or deductions, changes in our assessment of tax exposure
items, and the resolution of issues arising from tax audits with various tax authorities.
Goodwill and Intangible Assets
In assessing the recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair value of the
respective assets. We perform an annual review in the fourth quarter of each year, or more
frequently if indicators of potential impairment exist, to determine if the carrying value of
the recorded goodwill is impaired. Our impairment review process compares the fair value of the
reporting unit in which goodwill resides to its carrying value. We estimate the reporting
unit’s fair value based on a discounted future cash flow approach that requires us to estimate
income from operations based on historical results and discount rates based on a weighted
average cost of capital of comparable companies. If these estimates or their related
assumptions for commodity prices and demand change in the future, we may be required to record
impairment charges for these assets not previously recorded.
37
We reconcile the aggregate fair value of our reporting units to our market capitalization. The
reconciliation includes such factors as historical and industry multiples, industry performance
statistics, and recent comparable transaction pricing among other information.
Long-Lived Assets
We review the recoverability of our long-lived assets and must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets not previously recorded.
Impact of Recently Issued Accounting Standards
Please refer to Note 1 of the Notes to Consolidated Financial Statements for discussion of the
impact of recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of business, we are exposed to various market risk factors, including
changes in general economic conditions, domestic and foreign competition, foreign currency exchange
rates, and metals pricing and availability.
Commodity price risk
Metal prices are volatile due to, among other things, fluctuations in foreign and domestic
production capacity, raw material availability, metals consumption and foreign currency rates.
Decreases in metal prices could adversely affect our revenues, gross profit and net income.
Because we primarily purchase and sell in the “spot” market we are able to react quickly to changes
in metals pricing. This strategy also limits our exposure to commodity prices to our inventories
on hand. In an environment of increasing material costs our pricing usually increases as we try to
maintain the same gross profit percentage and typically generate higher levels of gross profit and
pre-tax income dollars for the same operational efforts. Conversely, if pricing declines, we will
typically generate lower levels of gross profit and pre-tax income dollars. In periods where
demand deteriorates rapidly and metal prices are declining significantly in a compressed period of
time, such as during the last three months of 2008 and first half of 2009, a portion of our
inventory on hand may be at higher costs than our selling prices, causing a significant adverse
effect on our gross profit and pre-tax income margins. However, when prices stabilize and our
inventories on hand reflect more current prices, our gross profit margins tend to return to more
normalized levels.
Foreign exchange rate risk
Because we have foreign operations, we are exposed to foreign currency exchange gains and
losses. Since the functional currency of our foreign operations is predominantly in their local
currency, the currency effects of translating the financial statements of those foreign
subsidiaries, which operate in local currency environments, are included in the “Accumulated Other
Comprehensive Loss” component of consolidated equity and do not impact earnings. However, foreign
currency transaction gains and losses do impact earnings and resulted in approximately $0.2 million
of gains in 2009 and $6.0 million of losses during 2008. During 2008 our primary exposure to
foreign currency rates related to our Canadian operations that had certain outstanding intercompany
borrowings denominated in the U.S. dollar that were not hedged. This exposure was significantly
reduced at the end of 2008 as the related balances were paid off.
Interest rate risk
We are exposed to market risk related to our fixed-rate and variable-rate long-term debt.
Market risk is the potential loss arising from adverse changes in market rates and prices, such as
interest rates. Changes in interest rates may affect the market value of our fixed-rate debt.
Under our current policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes and we do not currently anticipate repayment of our fixed-rate long-term
debt prior to scheduled maturities.
Market risk related to our variable-rate debt is estimated as the potential decrease in
pre-tax earnings resulting from an increase in interest rates. As of December 31, 2009, our total
variable interest rate debt outstanding amounted to approximately $124.5 million, which was
primarily comprised of the borrowings on our revolving credit facility of $115.0 million. A
hypothetical 1% increase in interest rates on $124.5 million of debt would result in approximately
$1.2 million of additional interest expense on an annual basis.
38
| Item 8. | Financial Statements and Supplementary Data. |
RELIANCE STEEL & ALUMINUM CO.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page | ||||
| 40 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 81 | ||||
FINANCIAL STATEMENT SCHEDULE: |
||||
| 82 | ||||
All other schedules are omitted because either they are not
applicable, not required or the information required is included
in the Consolidated Financial Statements, including the notes
thereto.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Reliance Steel & Aluminum Co.:
Reliance Steel & Aluminum Co.:
We have audited the accompanying consolidated balance sheets of Reliance Steel & Aluminum Co. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income,
equity, and cash flows for the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the 2009 and 2008 information in the related financial
statement schedule. These consolidated financial statements and the financial statement schedule
are the responsibility of Reliance Steel & Aluminum Co.’s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Reliance Steel & Aluminum Co. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the 2009 and 2008
information set forth therein.
As discussed in note 1 to the consolidated financial statements, in 2009 Reliance Steel & Aluminum
Co. changed the manner in which it accounts for business combinations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Reliance Steel & Aluminum Co.’s internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated February 26, 2010 expressed an unqualified opinion on the effectiveness of Reliance Steel &
Aluminum Co.’s internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
February 26, 2010
February 26, 2010
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Reliance Steel & Aluminum Co.
We have audited the accompanying consolidated statements of income, equity, and cash flows of
Reliance Steel & Aluminum Co. and subsidiaries for the year ended December 31, 2007. Our audit also
included the financial statement schedule for the year ended December 31, 2007 listed in the Index
at Item 15(a). These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of Reliance Steel &
Aluminum Co. and subsidiaries for the year ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule for the year ended December 31, 2007, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 28, 2008
February 28, 2008
41
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| December 31, | December 31, | |||||||
| 2009 | 2008 | |||||||
| ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 43,002 | $ | 51,995 | ||||
Accounts receivable, less allowance for doubtful accounts of
$21,269 at December 31, 2009 and $22,018 at December 31, 2008 |
533,871 | 851,214 | ||||||
Inventories |
719,915 | 1,284,468 | ||||||
Prepaid expenses and other current assets |
37,855 | 33,782 | ||||||
Income taxes receivable |
54,020 | 9,980 | ||||||
Deferred income taxes |
2,241 | 70,933 | ||||||
Total current assets |
1,390,904 | 2,302,372 | ||||||
Property, plant and equipment: |
||||||||
Land |
131,009 | 125,096 | ||||||
Buildings |
543,590 | 506,781 | ||||||
Machinery and equipment |
829,154 | 810,054 | ||||||
Accumulated depreciation |
(522,494 | ) | (443,225 | ) | ||||
| 981,259 | 998,706 | |||||||
Goodwill |
1,081,324 | 1,065,527 | ||||||
Intangible assets, net |
726,255 | 741,681 | ||||||
Cash surrender value of life insurance policies, net |
92,860 | 57,410 | ||||||
Investments in unconsolidated entities |
20,880 | 20,605 | ||||||
Other assets |
13,295 | 9,184 | ||||||
Total assets |
$ | 4,306,777 | $ | 5,195,485 | ||||
| LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 169,113 | $ | 248,312 | ||||
Accrued expenses |
51,730 | 59,982 | ||||||
Deferred revenue |
3,534 | 82,949 | ||||||
Accrued compensation and retirement costs |
67,012 | 123,707 | ||||||
Accrued insurance costs |
39,134 | 40,700 | ||||||
Current maturities of long-term debt |
86,383 | 93,877 | ||||||
Current maturities of capital lease obligations |
663 | 638 | ||||||
Total current liabilities |
417,569 | 650,165 | ||||||
Long-term debt |
849,375 | 1,671,732 | ||||||
Capital lease obligations |
3,182 | 3,833 | ||||||
Long-term retirement costs and other long-term liabilities |
92,632 | 94,361 | ||||||
Deferred income taxes |
335,897 | 340,326 | ||||||
Commitments and contingencies |
||||||||
Reliance shareholders’ equity: |
||||||||
Preferred stock, no par value: |
||||||||
Authorized shares — 5,000,000
None issued or outstanding |
— | — | ||||||
Common stock, no par value: |
||||||||
Authorized shares — 100,000,000
Issued and outstanding shares — 73,750,771 at December 31, 2009
and 73,312,714 at December 31, 2008, stated capital |
587,612 | 563,092 | ||||||
Retained earnings |
2,020,343 | 1,900,360 | ||||||
Accumulated other comprehensive loss |
(1,523 | ) | (32,016 | ) | ||||
Total Reliance shareholders’ equity |
2,606,432 | 2,431,436 | ||||||
Noncontrolling interests |
1,690 | 3,632 | ||||||
Total equity |
2,608,122 | 2,435,068 | ||||||
Total liabilities and equity |
$ | 4,306,777 | $ | 5,195,485 | ||||
See accompanying notes to consolidated financial statements.
42
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(In thousands, except share and per share amounts)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Net sales |
$ | 5,318,132 | $ | 8,718,844 | $ | 7,255,679 | ||||||
Costs and expenses: |
||||||||||||
Cost of sales (exclusive of depreciation
and amortization shown below) |
3,918,611 | 6,556,748 | 5,418,161 | |||||||||
Warehouse, delivery, selling, general and
administrative |
1,030,245 | 1,211,201 | 1,034,139 | |||||||||
Depreciation and amortization |
118,884 | 97,924 | 79,873 | |||||||||
| 5,067,740 | 7,865,873 | 6,532,173 | ||||||||||
Operating income |
250,392 | 852,971 | 723,506 | |||||||||
Other income (expense): |
||||||||||||
Interest |
(67,523 | ) | (82,575 | ) | (78,710 | ) | ||||||
Other income (expense), net |
12,624 | (3,840 | ) | 9,931 | ||||||||
Income before income taxes |
195,493 | 766,556 | 654,727 | |||||||||
Income tax provision |
46,317 | 282,921 | 246,438 | |||||||||
Net income |
149,176 | 483,635 | 408,289 | |||||||||
Less: Net income attributable to
noncontrolling interests |
1,018 | 858 | 334 | |||||||||
Net income attributable to Reliance |
$ | 148,158 | $ | 482,777 | $ | 407,955 | ||||||
Earnings per share: |
||||||||||||
Diluted earnings per common share
attributable to Reliance shareholders |
$ | 2.01 | $ | 6.56 | $ | 5.36 | ||||||
Weighted average shares outstanding —
diluted |
73,701,979 | 73,597,717 | 76,064,616 | |||||||||
Basic earnings per common share attributable
to Reliance shareholders |
$ | 2.02 | $ | 6.60 | $ | 5.39 | ||||||
Weighted average shares outstanding — basic |
73,445,583 | 73,102,215 | 75,622,799 | |||||||||
Cash dividends per share |
$ | .40 | $ | .40 | $ | .32 | ||||||
See accompanying notes to consolidated financial statements.
43
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share amounts)
(In thousands, except share and per share amounts)
| Reliance Shareholders | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | Non- | |||||||||||||||||||||||
| Common Stock | Retained | Comprehensive | controlling | |||||||||||||||||||||
| Shares | Amount | Earnings | Income (Loss) | Interests | Total | |||||||||||||||||||
Balance at January 1, 2007 |
75,702,046 | $ | 701,690 | $ | 1,046,339 | $ | (1,631 | ) | $ | 1,246 | $ | 1,747,644 | ||||||||||||
Net income |
— | — | 407,955 | — | 334 | 408,289 | ||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation gain |
— | — | — | 24,681 | — | 24,681 | ||||||||||||||||||
Unrealized loss on investments, net of tax |
— | — | — | (54 | ) | — | (54 | ) | ||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | (2,751 | ) | — | (2,751 | ) | ||||||||||||||||
Comprehensive income |
430,165 | |||||||||||||||||||||||
Capital contribution from noncontrolling
interest |
— | — | — | — | 119 | 119 | ||||||||||||||||||
Stock based compensation |
— | 10,120 | — | — | — | 10,120 | ||||||||||||||||||
Stock options exercised |
872,001 | 16,483 | 9,511 | — | — | 25,994 | ||||||||||||||||||
Stock repurchased |
(1,673,467 | ) | (82,168 | ) | — | — | — | (82,168 | ) | |||||||||||||||
Stock issued under incentive bonus
plan |
6,244 | 281 | — | — | — | 281 | ||||||||||||||||||
Cash dividends — $.32 per share |
— | — | (24,207 | ) | — | — | (24,207 | ) | ||||||||||||||||
Balance at December 31, 2007 |
74,906,824 | 646,406 | 1,439,598 | 20,245 | 1,699 | 2,107,948 | ||||||||||||||||||
Net income |
— | — | 482,777 | — | 858 | 483,635 | ||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Foreign currency translation loss |
— | — | — | (42,624 | ) | — | (42,624 | ) | ||||||||||||||||
Unrealized loss on investments, net of tax |
— | — | — | (1,163 | ) | — | (1,163 | ) | ||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | (8,474 | ) | — | (8,474 | ) | ||||||||||||||||
Comprehensive income |
431,374 | |||||||||||||||||||||||
Noncontrolling interests acquired |
— | — | — | — | 2,300 | 2,300 | ||||||||||||||||||
Payment to noncontrolling interest holder |
— | — | — | — | (1,225 | ) | (1,225 | ) | ||||||||||||||||
Stock based compensation |
— | 13,189 | — | — | — | 13,189 | ||||||||||||||||||
Stock options exercised |
844,338 | 17,987 | 9,693 | — | — | 27,680 | ||||||||||||||||||
Stock repurchased |
(2,443,500 | ) | (114,774 | ) | — | — | — | (114,774 | ) | |||||||||||||||
Adjustment to initially apply EITF 06-10 |
— | — | (2,479 | ) | — | — | (2,479 | ) | ||||||||||||||||
Stock issued under incentive bonus
plan |
5,052 | 284 | — | — | — | 284 | ||||||||||||||||||
Cash dividends — $.40 per share |
— | — | (29,229 | ) | — | — | (29,229 | ) | ||||||||||||||||
Balance at December 31, 2008 |
73,312,714 | 563,092 | 1,900,360 | (32,016 | ) | 3,632 | 2,435,068 | |||||||||||||||||
Net income |
— | — | 148,158 | — | 1,018 | 149,176 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Foreign currency translation gain |
— | — | — | 25,870 | — | 25,870 | ||||||||||||||||||
Unrealized gain on investments, net of tax |
— | — | — | 524 | — | 524 | ||||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | 4,099 | — | 4,099 | ||||||||||||||||||
Comprehensive income |
179,669 | |||||||||||||||||||||||
Noncontrolling interests purchased |
— | (1,758 | ) | — | — | (903 | ) | (2,661 | ) | |||||||||||||||
Payments to noncontrolling interest holder |
— | — | — | — | (2,057 | ) | (2,057 | ) | ||||||||||||||||
Stock based compensation |
— | 15,530 | — | — | — | 15,530 | ||||||||||||||||||
Stock options exercised |
427,697 | 10,490 | 1,208 | — | — | 11,698 | ||||||||||||||||||
Stock issued under incentive bonus
plan |
10,360 | 258 | — | — | — | 258 | ||||||||||||||||||
Cash dividends — $.40 per share |
— | — | (29,383 | ) | — | — | (29,383 | ) | ||||||||||||||||
Balance at December 31, 2009 |
73,750,771 | $ | 587,612 | $ | 2,020,343 | $ | (1,523 | ) | $ | 1,690 | $ | 2,608,122 | ||||||||||||
See accompanying notes to consolidated financial statements.
44
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 149,176 | $ | 483,635 | $ | 408,289 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
118,884 | 97,924 | 79,873 | |||||||||
Provision for deferred income taxes |
58,016 | 22,720 | 12,042 | |||||||||
Loss (gain) on sales of property and equipment |
138 | 2,658 | (1,181 | ) | ||||||||
Equity in earnings of unconsolidated entities |
(1,395 | ) | (565 | ) | — | |||||||
Dividends received from unconsolidated entities |
1,120 | — | — | |||||||||
Stock based compensation expense |
15,530 | 13,189 | 10,120 | |||||||||
Excess tax benefits from stock based compensation |
(1,533 | ) | (9,693 | ) | (9,511 | ) | ||||||
Net (gain) loss from life insurance policies |
(10,482 | ) | 4,373 | 231 | ||||||||
Changes in operating assets and liabilities (excluding effect of
businesses acquired): |
||||||||||||
Accounts receivable |
322,163 | 166,025 | 61,265 | |||||||||
Inventories |
569,943 | 191,472 | 129,582 | |||||||||
Prepaid expenses and other assets |
(56,439 | ) | (9,121 | ) | 11,087 | |||||||
Accounts payable and other liabilities |
(222,125 | ) | (297,933 | ) | (62,833 | ) | ||||||
Net cash provided by operating activities |
942,996 | 664,684 | 638,964 | |||||||||
Investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(69,901 | ) | (151,890 | ) | (124,127 | ) | ||||||
Acquisitions of metals service centers and net asset purchases of
metals service centers, net of cash acquired and debt assumed |
— | (330,249 | ) | (269,957 | ) | |||||||
Proceeds from sales of property, plant and equipment |
1,284 | 19,116 | 5,045 | |||||||||
Tax distributions made related to prior acquisitions |
— | (1,155 | ) | (619 | ) | |||||||
Net (investment in) borrowings from life insurance policies |
(31,544 | ) | 4,890 | (31,028 | ) | |||||||
Net proceeds from redemption of life insurance policies |
6,576 | 1,634 | 878 | |||||||||
Net cash used in investing activities |
(93,585 | ) | (457,654 | ) | (419,808 | ) | ||||||
Financing activities: |
||||||||||||
Proceeds from borrowings |
357,286 | 1,687,691 | 658,770 | |||||||||
Principal payments on long-term debt and short-term borrowings |
(1,188,454 | ) | (1,798,602 | ) | (778,520 | ) | ||||||
Debt issuance costs |
(6,841 | ) | (3,313 | ) | — | |||||||
Payments to noncontrolling interest holder |
(2,057 | ) | (1,225 | ) | — | |||||||
Dividends paid |
(29,383 | ) | (29,229 | ) | (24,207 | ) | ||||||
Excess tax benefit from stock based compensation |
1,533 | 9,693 | 9,511 | |||||||||
Exercise of stock options |
10,490 | 17,987 | 16,483 | |||||||||
Issuance of common stock |
258 | 284 | 281 | |||||||||
Noncontrolling interests purchased |
(2,661 | ) | — | — | ||||||||
Common stock repurchases |
— | (114,774 | ) | (82,168 | ) | |||||||
Net cash used in financing activities |
(859,829 | ) | (231,488 | ) | (199,850 | ) | ||||||
Effect of exchange rate changes on cash |
1,425 | (570 | ) | 242 | ||||||||
(Decrease) increase in cash and cash equivalents |
(8,993 | ) | (25,028 | ) | 19,548 | |||||||
Cash and cash equivalents at beginning of year |
51,995 | 77,023 | 57,475 | |||||||||
Cash and cash equivalents at end of year |
$ | 43,002 | $ | 51,995 | $ | 77,023 | ||||||
Supplemental cash flow information: |
||||||||||||
Interest paid during the year |
$ | 76,050 | $ | 74,654 | $ | 78,167 | ||||||
Income taxes paid during the year |
$ | 49,099 | $ | 267,224 | $ | 221,145 | ||||||
Non-cash investing and financing activities: |
||||||||||||
Debt assumed in connection with acquisitions of metals service centers |
$ | — | $ | 780,043 | $ | 86,622 | ||||||
Issuance of short-term notes payable in connection with acquisition of
a metals service center |
$ | — | $ | — | $ | 6,713 | ||||||
See accompanying notes to consolidated financial statements.
45
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
December 31, 2009
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Reliance Steel &
Aluminum Co. and its subsidiaries (collectively referred to as “the Company”, “we”, “our” or “us”).
The Company’s consolidated financial statements include the assets, liabilities and operating
results of majority-owned subsidiaries. The ownership of the other interest holders of consolidated
subsidiaries is reflected as noncontrolling interests. The Company’s investments in unconsolidated
subsidiaries are recorded under the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
Business
In 2009, the Company operated a metals service center network of more than 200 locations in 38
states, Belgium, Canada, China, Mexico, Singapore, South Korea and the United Kingdom that provided
value-added metals processing services and distributed a full line of more than 100,000 metal
products.
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, such as accounts receivable collectability, valuation of
inventories, goodwill, long-lived assets, income tax and other contingencies, and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Accounts Receivable and Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited due to the
geographically diverse customer base and various industries into which the Company’s products are
sold. Trade receivables are typically non-interest bearing and are initially recorded at cost.
Sales to the Company’s recurring customers are generally made on open account terms while sales to
occasional customers may be made on a C.O.D. basis when collectability is not assured. Past due
status of customer accounts is determined based on how recently payments have been received in
relation to payment terms granted. Credit is generally extended based upon an evaluation of each
customer’s financial condition, with terms consistent in the industry and no collateral required.
Losses from credit sales are provided for in the financial statements and consistently have been
within the allowance provided. The allowance is an estimate of the uncollectability of accounts
receivable based on an evaluation of specific customer risks along with additional reserves based
on historical and probable bad debt experience. Amounts are written off against the allowance in
the period the Company determines that the receivable is uncollectible. As a result of the above
factors, the Company does not consider itself to have any significant concentrations of credit
risk.
Inventories
A significant portion of our inventory is valued using the last-in, first-out (“LIFO”) method,
which is not in excess of market. Under this method, older costs are included in inventory, which
may be higher or lower than current costs. This method of valuation is subject to year-to-year
fluctuations in cost of material sold, which is influenced by the inflation or deflation existing
within the metals industry as well as fluctuations in our product mix and on-hand inventory levels.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current liabilities, and the current portion of long-term debt approximate
carrying values due to the short period of time to maturity. Fair values of long-term debt, which
have been determined based on borrowing rates currently available to the Company, or to other
companies with comparable credit ratings, for loans with similar terms or maturity, approximate the
carrying amounts in the consolidated financial statements with the exception of our $600 million
senior unsecured notes issued in November 2006. In April 2007, these notes were exchanged for
publicly traded notes registered with the Securities and Exchange Commission
(“SEC”). The fair values of these senior unsecured notes based on quoted market prices as of
December 31, 2009 and 2008 were
46
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
approximately $581.6 million and $421.6 million, respectively, compared to their carrying
values of approximately $598.1 million and $597.9 million, as of the end of each period.
Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months
or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents
with high-credit, quality financial institutions. The Company, by policy, limits the amount of
credit exposure to any one financial institution. At times, cash balances held at financial
institutions were in excess of federally-insured limits.
Goodwill
Goodwill is the excess of cost over the fair value of net assets of businesses acquired.
Goodwill is not amortized but is tested for impairment at least annually.
For purposes of performing annual goodwill impairment tests, the Company identified reporting
units in accordance with the guidance provided within the Segment Reporting topic of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”). The Company
tests for impairment of goodwill by calculating the fair value of a reporting unit using the
discounted cash flow method. Under this method, the fair market value of each reporting unit is
estimated based on expected future economic benefits discounted to a present value at a rate of
return commensurate with the risk associated with the investment. Year four of these projections
is considered the terminal year. Projected cash flows are discounted to present value using an
estimated weighted average cost of capital, which considers returns to both equity and debt
investors. The Company performs the required annual goodwill impairment evaluation on November 1
of each year. No impairment of goodwill was determined to exist for the years ended December 31,
2009, 2008, or 2007.
Impairment assessment inherently involves judgment as to assumptions about expected future
cash flows and the impact of market conditions on those assumptions. Future events and the current
changing market conditions may impact the Company’s assumptions as to commodity prices, demand and
future growth rates or other factors that may result in changes in estimates of future cash flows.
Although the Company believes the assumptions used in testing for impairment are reasonable,
significant changes in any one of the Company’s assumptions could produce a significantly different
result. Additionally, significant declines in the market conditions for the Company’s products as
well as in the price of its common stock could also significantly impact the impairment analysis.
An impairment charge, if incurred, could be material.
Long-Lived Assets
Property, plant and equipment is recorded at cost (or at fair value for assets acquired in
connection with business combinations) and the provision for depreciation of these assets is
generally computed on the straight-line method at rates designed to distribute the cost of assets
over the useful lives, estimated as follows:
Buildings
|
311/2 years | |
Machinery and equipment
|
3 — 20 years |
Other intangible assets deemed to have indefinite lives are not amortized but are subject
to annual impairment tests. No impairment of intangible assets with indefinite lives was determined
to exist for the years ended December 31, 2009, 2008, or 2007.
Other intangible assets with finite useful lives continue to be amortized over their useful
lives. The Company reviews the recoverability of its long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be recoverable. The
estimated future cash flows are based upon, among other things, assumptions about future operating
performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are
grouped with other assets to the lowest level for which identifiable cash flows are largely
independent of the cash flows of other groups of assets and liabilities. If the sum of the
projected undiscounted cash flows (excluding interest) is less than the carrying value of the
assets, the assets will be written down to the estimated fair value in the period in which the
determination is made. Long-lived asset related impairment losses recognized during the years ended
December 31, 2009, 2008 and 2007 were not significant.
47
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Revenue Recognition
The Company recognizes revenue from product or processing sales upon concluding that all of
the fundamental criteria for product revenue recognition have been met, such as a fixed and
determinable sales price; reasonable assurance of collectability; and passage of title and risks of
ownership to the buyer. Such criteria are usually met upon delivery to the customer for orders with
FOB destination terms or upon shipment for orders with FOB shipping point terms, or at the time
toll processing services are performed. Considering the close proximity of our customers to our
metals service center locations, shipment and delivery of our orders generally occur on the same
day. Billings for orders where the revenue recognition criteria are not met, which primarily
include certain bill and hold transactions (in which our customers request to be billed for the
material but request delivery at a later date), are recorded as deferred revenue.
Shipping and handling charges are included as revenue in Net sales. Costs incurred in
connection with shipping and handling the Company’s products which are related to third-party
carriers are not material and are typically included in Cost of sales. Costs incurred in connection
with shipping and handling the Company’s products that are performed by Company personnel are
typically included in operating expenses. For the years ended December 31, 2009, 2008 and 2007,
shipping and handling costs included in Warehouse, delivery, selling, general and administrative
expenses were approximately $179.8 million, $217.8 million, and $184.4 million, respectively.
Segment Information
Our operating segments have been aggregated into one reportable segment, metals service
centers, based on the similar economic characteristics criteria as our operating segments have a
similar long-term business model, operate at similar gross profit margins, have similar expense
structures, and have similar working capital needs. All of our recent acquisitions were metals
service centers and did not result in new reportable segments. Although a variety of products or
services are sold at each of our various locations, in total, sales were comprised of the following
in each of the three years ended December 31:
| 2009 | 2008 | 2007 | ||||||||||
Carbon steel |
56 | % | 55 | % | 46 | % | ||||||
Aluminum |
18 | 16 | 19 | |||||||||
Stainless steel |
13 | 14 | 19 | |||||||||
Alloy steel |
7 | 8 | 9 | |||||||||
Toll processing |
2 | 2 | 2 | |||||||||
Other |
4 | 5 | 5 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
The following table summarizes consolidated financial information of the Company’s
operations by geographic location based on where sales originated from:
| Foreign | ||||||||||||
| United States | Countries | Total | ||||||||||
| (in thousands) | ||||||||||||
Year Ended December 31, 2009 |
||||||||||||
Net sales |
$ | 5,122,214 | $ | 195,918 | $ | 5,318,132 | ||||||
Long lived assets |
2,762,560 | 153,313 | 2,915,873 | |||||||||
Year Ended December 31, 2008 |
||||||||||||
Net sales |
8,341,394 | 377,450 | 8,718,844 | |||||||||
Long lived assets |
2,743,284 | 149,829 | 2,893,113 | |||||||||
Year Ended December 31, 2007 |
||||||||||||
Net sales |
6,902,040 | 353,639 | 7,255,679 | |||||||||
Long lived assets |
2,088,342 | 173,732 | 2,262,074 | |||||||||
Stock-Based Compensation
All of the Company’s stock-based compensation plans are considered equity plans under U.S.
GAAP. The Company calculates the fair value of stock option awards on the date of grant based on
the closing market price of the Company’s common stock, using a Black-Scholes option-pricing model.
The fair value of stock option awards is expensed on a straight-line basis
48
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
over the vesting period of the options, net of estimated forfeitures. The stock-based compensation expense recorded was
$15.5 million, $13.2 million, and $10.1 million for the years ended December 31, 2009, 2008 and
2007, respectively, and is included in Warehouse, delivery, selling, general and administrative
expense caption of the Company’s consolidated statements of income.
Environmental Remediation Costs
The Company accrues for losses associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the remediation
feasibility study. Such accruals are adjusted as further information develops or circumstances
change. Recoveries of environmental remediation costs from other parties are recorded as assets
when their receipt is deemed probable. The Company’s management is not aware of any environmental
remediation obligations that would materially affect the operations, financial position or cash
flows of the Company.
Income Taxes
The Company files a consolidated U.S. federal income tax return with its wholly-owned
subsidiaries. The deferred tax assets and/or liabilities are determined by multiplying the
differences between the financial reporting and tax reporting bases for assets and liabilities by
the enacted tax rates expected to be in effect when such differences are recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the period that
includes the enactment date of the change. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets and liabilities.
The Company evaluates on a quarterly basis whether, based on all available evidence, it is probable
that the deferred income tax assets are realizable. Valuation allowances are established when it is
estimated that it is more likely than not that the tax benefit of the deferred tax asset will not
be realized.
The Company regularly makes a comprehensive review of its uncertain tax positions. Tax
benefits are recognized when it is more-likely-than-not that a tax position will be sustained upon
examination by the authorities. The benefit from a position that has surpassed the
more-likely-than-not threshold is the largest amount of benefit that is more than 50% likely to be
realized upon settlement. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits as a component of income tax expense.
Foreign Currencies
The currency effects of translating the financial statements of those foreign subsidiaries of
the Company which operate in local currency environments are included in the “Accumulated Other
Comprehensive Loss” component of Reliance shareholders’ equity. Gains and losses resulting from
foreign currency transactions are included in the results of operations in Other income (expense),
net caption and amounted to a net gain of approximately $0.2 million for the year ended December
31, 2009, a net loss of approximately $6.0 million for the year ended December 31, 2008 and a net
gain of approximately $7.3 million for the year ended December 31, 2007.
Impact of Recently Issued Accounting Standards – Previously Adopted
Postretirement Benefit Plan Disclosures – On December 31, 2009, the Company adopted changes to
employers’ disclosures about postretirement benefit plan assets issued by the FASB, which requires
enhanced disclosures about plan assets in an employer’s defined benefit pension or other
postretirement plans. These enhanced disclosures are intended to provide users of financial
statements with a greater understanding of how investment allocation decisions are made, the major
categories of plan assets, the inputs and valuation techniques used to measure the fair value of
plan assets and significant concentrations of risk within plan assets. The adoption of these
changes did not have a material impact on the Company’s financial position, results of operations
or cash flows. See Note 11 for related disclosures.
Fair Value Accounting – On January 1, 2008, the Company adopted changes issued by the FASB to
fair value accounting and reporting as it relates to financial assets and financial liabilities
that are recognized or disclosed at fair value in the financial statements on at least an annual
basis. These changes defined fair value, established a framework for measuring fair value in
generally accepted accounting principles and expanded disclosures about fair value measurements.
Accordingly, these changes were not initially applied to goodwill and other intangible assets held
by the Company and measured annually for impairment
49
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
testing purposes only. On January 1, 2009, the Company adopted the remaining changes in this area as
they relate to non-financial assets, such as goodwill and other intangible assets, and non-financial
liabilities. The adoption of all these changes did not have a material effect on the Company’s financial
statements or notes thereto.
On January 1, 2008, the Company adopted changes issued by the FASB, which permits entities to
choose to measure many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date. The Company did not elect to apply the fair value
option to any of its financial assets and liabilities. Therefore, the adoption of these changes did
not have any impact on the Company’s consolidated financial position, results of operations or cash
flows.
Business Combinations – On January 1, 2009, the Company adopted changes issued by the FASB for
accounting for business combinations. In accordance with the new guidance, upon initially obtaining
control, the acquiring entity in a business combination must recognize 100% of the fair values of
the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even
if the acquirer has not acquired 100% of its target. As a consequence, the step acquisition model
has been eliminated. Also, contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price consideration. In addition, all
transaction costs will be expensed as incurred. This new guidance is effective on a prospective
basis for all business combinations for which the acquisition date is on or after the beginning of
the first annual period subsequent to December 15, 2008, or January 1, 2009 for the Company, with
the exception of the accounting for valuation allowances on deferred taxes and acquired tax
contingencies such that adjustments made to valuation allowances on deferred taxes and acquired tax
contingencies associated with acquisitions that closed prior to the effective date of the new
guidance would be recorded as adjustments to income tax expense or benefit rather than goodwill. In
accordance with the provisions of the new guidance, the Company made adjustments to certain tax
contingencies due to lapses in the statute-of-limitation periods and settlements in the combined
amount of approximately $9.9 million that were associated with past acquisitions. See Note 9,
Income Taxes, for additional details. All other new guidance in this area will only impact the
Company if it is a party to a business combination after the new guidance has been adopted. The
Company was not party to any business combinations after the adoption date of this standard.
Consolidation Accounting – On January 1, 2009, the Company adopted changes issued by the FASB
to consolidation accounting and reporting. These changes establish new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. In accordance with the new guidance, the Company classified noncontrolling interests
as equity on its consolidated balance sheets as of December 31, 2009 and 2008 and presented net
income attributable to noncontrolling interests separately on the consolidated statements of income
for each of the three years ended December 31, 2009.
Other – On September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of U.S. Generally Accepted Accounting Principles. These changes establish
the FASB Codification as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial statements in conformity
with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be
authoritative in their own right as they will only serve to update the Codification. These changes
and the Codification itself do not change GAAP. Other than the manner in which new accounting
guidance is referenced, the adoption of these changes had no impact on the Company’s financial
statements.
On June 30, 2009, the Company adopted changes issued by the FASB for subsequent events. These
changes set forth the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that occur after the balance
sheet date. The adoption of these changes did not have a material impact on the Company’s financial
position, results of operations or cash flows.
On January 1, 2008, the Company adopted changes issued by the FASB to determine whether a
liability for the postretirement benefit associated with a collateral assignment split-dollar life
insurance arrangement should be recorded. The literature also provides guidance on how a company
should recognize and measure the asset in a collateral assignment split-
50
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
dollar life insurance contract. The Company had a limited number of life insurance policies that were within the scope of
this literature. The adoption of changes did not have a material impact on the Company’s
consolidated results of operations, financial position or cash flows.
Impact of Recently Issued Accounting Standards – Not Yet Adopted
In June 2009, the FASB issued literature intended to replace the quantitative-based risks and
rewards calculation for determining which reporting entity, if any, has a controlling financial
interest in a variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity. The revised approach is expected to be more
effective for identifying which reporting entity has a controlling financial interest in a variable
interest entity. The literature also requires additional disclosures about a reporting entity’s
involvement in variable interest entities, which will enhance the information provided to users of
financial statements. This guidance must be applied as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, or January 1, 2010 for the
Company. The Company does not expect the adoption of this new guidance to have a material impact on
the Company’s results of operations, financial position or cash flows.
Note 2. Acquisitions
2008 Acquisitions
Acquisition of HLN Metal Centre Pte. Ltd.
In August 2008, the Company formed Reliance Metalcenter Asia Pacific Pte. Ltd. (“RMAP”), a
Singapore corporation. On September 17, 2008, RMAP acquired the assets, including the inventory,
machinery, and equipment, of the Singapore operation of HLN Metal Centre Pte. Ltd. RMAP focuses
primarily on supplying metal to the electronics, semiconductor, and solar energy markets. The all
cash purchase price was funded with borrowings on the Company’s revolving credit facility. Net
sales of RMAP for the year ended December 31, 2009 and during the period from September 17, 2008
through December 31, 2008 were approximately $3.0 million and $1.0 million, respectively.
Acquisition of PNA Group Holding Corporation
On August 1, 2008, the Company acquired all of the outstanding capital stock of PNA Group
Holding Corporation (“PNA”), a Delaware corporation, in accordance with the Stock Purchase
Agreement dated June 16, 2008. The Company paid cash consideration of approximately $321.0 million,
net of purchase price adjustments, repaid or refinanced debt of PNA or its subsidiaries in the
amount of approximately $725.2 million, paid related tender offer and consent solicitation premium
payments of approximately $54.8 million and incurred direct acquisition costs of approximately $3.0
million for a total transaction value of approximately $1.10 billion. The Company funded the
acquisition with proceeds from a $500 million senior unsecured term loan and borrowings under its
existing $1.1 billion syndicated unsecured revolving credit facility.
PNA’s subsidiaries include the operating entities Delta Steel, Inc., Feralloy Corporation,
Infra-Metals Co., Metals Supply Company, Ltd., Precision Flamecutting and Steel, Inc. and Sugar
Steel Corporation. We operate PNA as six distinct businesses that process and distribute primarily
carbon steel plate, bar, structural and flat-rolled products with 21 steel service centers
throughout the United States, as well as four joint ventures with six additional service centers in
the United States and Mexico. PNA’s net sales for the year ended December 31, 2009 and the five
months ended December 31, 2008 were approximately $1.01 billion and $887.6 million, respectively.
51
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
The allocation of the total purchase price of PNA to the fair values of the assets acquired
and liabilities assumed is as follows:
| (in thousands) | ||||
Cash |
$ | 9,845 | ||
Accounts receivable |
336,369 | |||
Inventories |
584,307 | |||
Property, plant and equipment |
113,627 | |||
Goodwill |
237,855 | |||
Intangible assets subject to amortization |
167,200 | |||
Intangible assets not subject to amortization |
126,000 | |||
Other current and long-term assets |
59,062 | |||
Total assets acquired |
1,634,265 | |||
Current and long-term debt |
(780,043 | ) | ||
Deferred income taxes |
(129,870 | ) | ||
Other current and long-term liabilities |
(400,372 | ) | ||
Total liabilities assumed |
(1,310,285 | ) | ||
Net assets acquired |
$ | 323,980 | ||
Acquisition of Dynamic Metals International LLC
Effective April 1, 2008, the Company, through its subsidiary Service Steel Aerospace Corp.,
acquired the business of Dynamic Metals International LLC (“Dynamic”) based in Bristol,
Connecticut. Dynamic was founded in 1999 and is a specialty metal distributor. Dynamic has been
merged into and currently operates as a division of Service Steel Aerospace Corp. headquartered in
Tacoma, Washington. The all cash purchase price was funded with borrowings on the Company’s
revolving credit facility. Dynamic’s net sales for the year ended December 31, 2009 and the nine
months ended December 31, 2008 were approximately $9.6 million and $8.7 million, respectively.
2007 Acquisitions
Acquisition of Metalweb plc
As of October 1, 2007, the Company acquired all of the outstanding capital stock of Metalweb
plc (“Metalweb”), a metals service center company headquartered in Birmingham, England. Metalweb,
established in 2001, specializes in the processing and distribution of primarily aluminum products
for non-structural aerospace components and general engineering parts and has three additional
service centers located in London, Manchester and Oxford, England. Metalweb has been re-registered
as Metalweb Limited.
Acquisition of Clayton Metals, Inc.
On July 1, 2007, the Company acquired all of the outstanding capital stock of Clayton Metals,
Inc. (“Clayton Metals”), an Illinois corporation headquartered in Wood Dale, Illinois. Clayton
Metals, founded in 1976, specializes primarily in the processing and distribution of aluminum,
stainless steel and red metal flat-rolled products, custom extrusions and aluminum circles through
its metals service center locations in Wood Dale, Illinois; Cerritos, California; High Point, North
Carolina; and Parsippany, New Jersey. The Company closed the North Carolina operation in early
2009.
Acquisition of Encore Group
As of February 1, 2007, the Company acquired the net assets and business of the Encore Group
(“Encore”) of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore
Coils, and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in
2004 in connection with the buyout by management and a private equity fund of certain former Corus
CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy
and carbon bar and tube, as well as stainless steel sheet, plate and bar products, through its
currently 12 facilities located mainly in Western Canada. The Canadian Encore group businesses now
operate as divisions or subsidiaries of Reliance Metals Canada Limited.
52
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Effective January 1, 2008, the Company sold certain assets and the business of the Encore
Coils division for total proceeds of approximately $16.1 million. The Company retained one of the
Encore Coils facilities to perform toll processing services until we sold those assets in October
2008. Costs related to the sale and the resulting loss from the sale were not material.
Acquisition of Crest Steel Corporation
On January 2, 2007, the Company purchased all of the outstanding capital stock of Crest Steel
Corporation (“Crest”), a metals service center company headquartered in Carson, California with
facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes
in the processing and distribution of carbon steel products including flat-rolled, plate, bars and
structurals.
Acquisition of Industrial Metals and Surplus, Inc.
Also on January 2, 2007, the Company, through its wholly-owned subsidiary Siskin Steel &
Supply Company, Inc. (“Siskin”), purchased the outstanding capital stock of Industrial Metals and
Surplus, Inc. (“Industrial Metals”), a metals service center company headquartered in Atlanta,
Georgia and a related company, Athens Steel, Inc. (“Athens Steel”), located in Athens, Georgia.
Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon
steel structurals, flat-rolled and ornamental iron products. Industrial Metals and Athens Steel now
operate as divisions of Siskin.
Summary purchase price allocations for 2007 acquisitions
The total cost of the acquisitions of Clayton Metals, Crest, Industrial Metals, Encore Group
and Metalweb of approximately $281.4 million was funded with borrowings on the Company’s revolving
credit facility. Total debt assumed, net of cash, in connection with these acquisitions was
approximately $81.8 million. The allocation of the total purchase price to the fair values of the
assets acquired and liabilities assumed is as follows:
| (in thousands) | ||||
Cash consideration, including direct acquisition costs |
$ | 274,730 | ||
Debt issued |
6,713 | |||
Total purchase price |
$ | 281,443 | ||
Allocation of the total purchase price to the fair
values of assets acquired and liabilities assumed: |
||||
Cash |
$ | 4,773 | ||
Accounts receivable |
82,373 | |||
Inventory |
130,814 | |||
Property, plant and equipment |
27,685 | |||
Goodwill |
91,720 | |||
Intangible assets subject to amortization |
63,690 | |||
Intangible assets not subject to amortization |
47,218 | |||
Other current and long-term assets |
5,485 | |||
Total assets acquired |
453,758 | |||
Total liabilities assumed |
(172,315 | ) | ||
Net assets acquired/Purchase price |
$ | 281,443 | ||
Summary purchase price allocation information for all acquisitions
All of the acquisitions discussed in this note have been accounted for under the purchase
method of accounting and, accordingly, each purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at the date of each
acquisition. The accompanying consolidated statements of income include the revenues and expenses
of each acquisition since its respective acquisition date. The consolidated balance sheets reflect
the allocations of each acquisition’s purchase price as of December 31, 2009 or 2008, as
applicable.
As part of the purchase price allocations of the 2008 and 2007 acquisitions, $126.0 million
and $47.2 million, respectively, were allocated to the trade names acquired, none of which is
subject to amortization. The Company determined that the trade names acquired in connection with
these acquisitions had indefinite lives since their economic lives are expected to approximate
53
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
the life of each company acquired. Additionally, the Company recorded other identifiable intangible
assets related to customer relationships for 2008 and 2007 acquisitions of $171.2 million and $62.0
million, respectively, with weighted average lives of 12.4 and 23.6 years, respectively. The
goodwill amounts from the 2008 and 2007 acquisitions are expected to be deducted for tax purposes
in future years with the exception of the PNA and Crest goodwill amounts. Total tax deductible
goodwill amounted to approximately $378.8 million as of December 31, 2009.
Pro forma financial information
The following unaudited pro forma summary financial results present the consolidated results
of operations as if our 2008 and 2007 acquisitions had occurred at the beginning of each reporting
period, after the effect of certain adjustments, including increased depreciation expense resulting
from recording fixed assets at fair value, interest expense on the acquisition debt, amortization
of certain identifiable intangible assets, certain non-recurring executive compensation costs that
Reliance does not incur after taking control of the acquired entities, and a provision for income
taxes for companies that were previously taxed as S-Corporations under Section 1361 of the Internal
Revenue Code. The pro forma summary financial results reflect the acquired companies’ historical
method for inventory valuation, which was the first-in, first-out (“FIFO”) method through the
acquisition date. All domestic acquisitions adopted the last-in, first-out (“LIFO”) method of
inventory valuation upon acquisition.
The pro forma results have been presented for comparative purposes only and are not indicative
of what would have occurred had these acquisitions been made as of January 1, 2008 or January 1,
2007, or of any potential results which may occur in the future.
| Year Ended December 31, | ||||||||
| 2008 | 2007 | |||||||
| (in thousands, except per share amounts) | ||||||||
Pro forma (unaudited): |
||||||||
Net sales |
$ | 10,068,081 | $ | 9,010,513 | ||||
Net income attributable to Reliance |
$ | 561,155 | $ | 434,257 | ||||
Diluted earnings per common share
attributable to Reliance shareholders |
$ | 7.62 | $ | 5.71 | ||||
Basic earnings per common share
attributable to Reliance shareholders |
$ | 7.68 | $ | 5.74 | ||||
Note 3. Joint Ventures
The equity method of accounting is used where the Company’s investment in voting stock gives
it the ability to exercise significant influence over the investee, generally 20% to 50%. The
financial results of investees are generally consolidated when ownership interest is greater than
50%.
In connection with the PNA acquisition, the Company also acquired interests in four joint
venture arrangements. In three of those joint ventures, the Company has noncontrolling interests.
The equity method is used to account for the investments in Indiana Pickling and Processing
Company, Acero Prime S. de R.L. de C.V. and Oregon Feralloy Partners LLC. The corresponding
investments in these entities are reflected in the Investments in unconsolidated entities caption
of the balance sheet. Equity in earnings of these entities has not been material to our results of
operations.
Feralloy Processing Company is the fourth joint venture arrangement the Company acquired in
connection with the PNA acquisition. The Company also has two separate joint venture arrangements,
through which we own Everest Metals (Suzhou) Co., Ltd. and Valex China Co. Ltd., for operations in
the People’s Republic of China. The results of these majority-owned operations are consolidated in
the Company’s financial results and have not been material in each of the three years ended
December 31, 2009. The portion of the earnings related to the noncontrolling shareholder interests
has been reflected as Net income attributable to noncontrolling interests caption in the
accompanying statements of income.
Note 4. Inventories
Inventories of the Company have primarily been stated on the last-in, first-out (“LIFO”)
method, which is not in excess of market. The Company uses the LIFO method of inventory valuation
because it results in a better matching of costs and revenues. As of December 31, 2009 and 2008,
cost on the first-in, first-out (“FIFO”) method exceeded the LIFO value of
54
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
inventories by $82.8 million and $387.8 million, respectively. Inventories of $87.0 million and $195.5 million as of
December 31, 2009 and 2008, respectively, were stated on the FIFO method, which is not in excess of
market.
Significant cost decreases in 2009 for the majority of our products were the primary cause of
the $305.0 million change in the LIFO valuation reserve, which lowered cost of sales. This amount,
however, is net of the impact of inventory quantity reductions, which resulted in a liquidation of
LIFO inventory quantities carried at higher costs prevailing in prior years as compared with the
cost of 2009 purchases, the effect of which increased cost of sales by approximately $26.3 million
in 2009.
Note 5. Goodwill
The changes in the carrying amount of goodwill are as follows:
| (in thousands) | ||||
Balance as of January 1, 2007 |
$ | 784,871 | ||
Acquisitions |
91,720 | |||
Purchase price allocation adjustments |
3,370 | |||
Effect of foreign currency translation |
6,191 | |||
Balance as of December 31, 2007 |
886,152 | |||
Acquisitions |
232,699 | |||
Purchase price allocation adjustments |
(45,327 | ) | ||
Effect of foreign currency translation |
(7,997 | ) | ||
Balance as of December 31, 2008 |
1,065,527 | |||
Purchase price allocation adjustments |
10,038 | |||
Effect of foreign currency translation |
5,759 | |||
Balance as of December 31, 2009 |
$ | 1,081,324 | ||
The Company had no accumulated impairment losses related to goodwill as of December 31,
2009. The goodwill adjustments recorded in the year ended December 31, 2009 pertained to the
finalization of the PNA purchase price allocation with respect to income taxes payable and deferred
income taxes.
Note 6. Intangible Assets, net
Intangible assets, net, consisted of the following:
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| (in thousands) | ||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||
Covenants not to compete |
$ | 6,853 | $ | (6,558 | ) | $ | 6,853 | $ | (6,363 | ) | ||||||
Loan fees |
23,868 | (10,592 | ) | 19,460 | (8,759 | ) | ||||||||||
Customer list/relationships |
345,035 | (58,749 | ) | 339,518 | (34,231 | ) | ||||||||||
Software – internal use |
8,100 | (3,038 | ) | 8,100 | (2,228 | ) | ||||||||||
Other |
4,949 | (1,297 | ) | 5,146 | (1,036 | ) | ||||||||||
| 388,805 | (80,234 | ) | 379,077 | (52,617 | ) | |||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||
Trade names |
417,684 | — | 415,221 | — | ||||||||||||
| $ | 806,489 | $ | (80,234 | ) | $ | 794,298 | $ | (52,617 | ) | |||||||
Amortization expense for intangible assets amounted to approximately $29.8 million, $19.1
million and $12.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Included in amortization expense for the year ended December 31, 2009 is the write-off of deferred
financing costs with a net book value of $1.6 million related to our $500 million term loan, which
was paid off in September 2009. Additionally, in connection with the Company’s amendment of its
$1.1 billion revolving credit facility in September 2009, the Company capitalized $6.8 million in
loan fees. All other changes in intangible assets during the year ended December 31, 2009 are due
to foreign currency translation.
55
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
The following is a summary of estimated aggregate amortization expense for each of the next
five years (in thousands):
2010 |
$ | 28,815 | ||
2011 |
28,523 | |||
2012 |
27,983 | |||
2013 |
25,303 | |||
2014 |
23,201 |
Note 7. Cash Surrender Value of Life Insurance Policies, net
The Company’s wholly-owned subsidiary, EMJ, is the owner and beneficiary of life insurance
policies on all former nonunion employees of a predecessor company including certain current
employees of EMJ. These policies, by providing payments to EMJ upon the death of covered
individuals, were designed to provide cash to EMJ in order to repurchase shares held by employees
in EMJ’s former Stock Bonus Plan and shares held individually by employees upon the termination of
their employment. The Company is also the owner and beneficiary of key man life insurance policies
on certain current and former executives of the Company, its subsidiaries and predecessor
companies.
Cash surrender value of the life insurance policies increases by a portion of the amount of
premiums paid and by interest and dividend income earned under the policies. Income earned under
the policies held by EMJ totaled $34.7 million during the year ended December 31, 2009 and is
recorded in the Other income (expense), net caption in the accompanying statements of income (see
Note 13).
Annually, EMJ will either borrow against the cash surrender value of policies to pay a portion
of the premiums and accrued interest on loans against those policies or pay the accrued interest
and premiums using available cash on hand. No borrowings against the cash surrender values of the
policies were made during 2009. The 2009 annual payment of accrued interest on the outstanding
loans and premiums was financed by cash flows from operations. In 2008, the Company borrowed
approximately $33.4 million against the cash surrender values of the policies to pay for accrued
interest of $28.7 million and premiums of $4.7 million. Interest rates on borrowings under the
life insurance policies are fixed at 11.76% and the portion of the policy cash surrender value that
the borrowings relate to earns interest and dividend income at 11.26%. The unborrowed portion of
the policy cash surrender value earns income at rates commensurate with certain risk-free U.S.
Treasury bond yields but not less than 4.0%.
As of December 31, 2009 and 2008, loans and accrued interest outstanding on EMJ’s life
insurance policies were approximately $274.4 million and $282.8 million, respectively. Also, as of
December 31, 2009 and 2008, approximately $57.6 million and $29.8 million were available for future
borrowings, respectively. Interest expense on borrowings on cash surrender values made by EMJ
during the year ended December 31, 2009 totaled $31.7 million and is included in the Other income
(expense), net caption in the accompanying statements of income (See Note 13).
The cash surrender value of all life insurance policies held by the Company, net of loans and
related accrued interest, were $92.9 million and $57.4 million as of December 31, 2009 and 2008,
respectively.
56
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Note 8. Long-Term Debt
Long-term debt consists of the following:
| December 31, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Unsecured revolving credit facility due November 9, 2012 |
$ | 115,000 | $ | 453,000 | ||||
Senior unsecured term loan repaid on September 28, 2009 |
— | 481,250 | ||||||
Senior unsecured notes repaid on January 2, 2009 |
— | 10,000 | ||||||
Senior unsecured notes due October 15, 2010 |
78,000 | 78,000 | ||||||
Senior unsecured notes due from July 1, 2011 to July 2, 2013 |
135,000 | 135,000 | ||||||
Senior unsecured notes due November 15, 2016 |
350,000 | 350,000 | ||||||
Senior unsecured notes due November 15, 2036 |
250,000 | 250,000 | ||||||
Other notes and revolving credit facilities |
9,684 | 10,427 | ||||||
Total |
937,684 | 1,767,677 | ||||||
Less unamortized discount |
(1,926 | ) | (2,068 | ) | ||||
Less amounts due within one year |
(86,383 | ) | (93,877 | ) | ||||
Total long-term debt |
$ | 849,375 | $ | 1,671,732 | ||||
Unsecured Revolving Credit Facility
The Company’s $1.1 billion unsecured revolving credit facility has 17 banks as lenders. On
September 28, 2009, the Company amended its syndicated credit agreement to adjust certain financial
ratio requirements (primarily related to minimum interest coverage ratio and maximum leverage
ratio) until June 30, 2010 at which time these ratios adjust back to the pre-amendment levels. With
the amendment, the pricing on the revolving credit facility was adjusted to market rates and
restrictions were placed on certain uses of cash until June 30, 2010 for acquisitions, dividends,
investments, and stock repurchases. Also, with the amendment, the Company extended the maturity
date of $1.02 billion in commitments for extending lenders through November 9, 2012, while the
maturity date of $80.0 million in commitments for non-extending lenders remains at November 9,
2011. Interest on borrowings from extending lenders is at variable rates based on LIBOR plus 3.50%
or the bank prime rate plus 2.50% as of December 31, 2009. Interest on borrowings from
non-extending lenders is at variable rates based on LIBOR plus 0.45% or the bank prime rate as of
December 31, 2009. The revolving credit facility includes a commitment fee on the unused portion,
at an annual rate of 0.40% and 0.10% for extending and non-extending lenders, respectively, as of
December 31, 2009. The applicable margin over LIBOR rate and base rate borrowings along with
commitment fees are subject to adjustment every quarter prospectively based on the Company’s
leverage ratio.
Weighted average rates on borrowings outstanding on the revolving credit facility were 3.51%
and 2.67% as of December 31, 2009 and 2008, respectively.
As of December 31, 2009, the Company had $50.5 million of letters of credit outstanding under
the revolving credit facility with availability to issue an additional $74.5 million of letters of
credit.
Revolving Credit Facilities — Foreign Operations
The Company also had two separate revolving credit facilities for operations in Canada with a
combined credit limit of CAD$35.0 million as of December 31, 2009. There were no borrowings
outstanding on these revolving credit facilities as of December 31, 2009 and 2008. In January
2010, the Canadian credit facilities were combined into one unsecured facility with a credit limit of
CAD$5.0 million.
Various other separate revolving credit facilities with a combined credit limit of
approximately $22.8 million are in place for operations in: a) Asia with outstanding balances of
$6.6 million and $1.6 million as of December 31, 2009 and 2008, respectively, and b) the United
Kingdom with outstanding balances of $1.5 million and $5.8 million at December 31, 2009 and 2008,
respectively.
57
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Senior Unsecured Term Loan
In connection with the PNA acquisition, the Company entered into a $500 million senior
unsecured term loan on July 31, 2008. The loan initially carried interest at variable rates based
on LIBOR plus 2.25% and required quarterly installment payments of principal in the amount of
approximately $18.8 million beginning December 31, 2008, with the remaining balance due on November
9, 2011. Concurrent with the Company’s amendment of its syndicated credit facility on September 28,
2009, the term loan was paid off and terminated.
Senior Unsecured Notes — Private Placements
The Company also has $213.0 million of outstanding senior unsecured notes issued in private
placements of debt as of December 31, 2009. At December 31, 2009, the outstanding senior notes bear
interest at a weighted average fixed rate of 5.71% and have a weighted average remaining life of
1.9 years, maturing from 2010 to 2013.
Senior Unsecured Notes — Publicly Traded
On November 20, 2006, the Company entered into an Indenture (the “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. The notes are senior unsecured obligations of Reliance and rank
equally with all other existing and future unsecured and unsubordinated debt obligations of
Reliance. The senior unsecured notes include provisions that, in the event of a change in control
and a downgrade of the Company’s credit rating, require the Company to make an offer to repurchase
the notes at a price equal to 101% of their principal amount plus accrued interest.
Covenants
The $1.1 billion revolving credit facility and the senior unsecured note agreements
collectively require the Company to maintain a minimum net worth and interest coverage ratio and a
maximum leverage ratio and include a change of control provision, among other things. The Company’s
interest coverage ratio for the last twelve-month period ended December 31, 2009 was approximately
3.9 times compared to the debt covenant minimum requirement of 2.0 times (interest coverage ratio
is calculated as net income attributable to Reliance plus interest expense and provision for income
taxes and plus or minus any non-operating non-recurring loss or gain, respectively, divided by
interest expense). The Company’s leverage ratio as of December 31, 2009 calculated in accordance
with the terms of the revolving credit facility was 27.5% compared to the financial covenant
maximum amount of 50% (leverage ratio is calculated as total debt, inclusive of capital lease
obligations and outstanding letters of credit, divided by Reliance shareholders’ equity plus total
debt). Beginning June 30, 2010, the minimum interest coverage ratio and maximum leverage ratio
requirements adjust back to the pre-amendment levels of 3.0 times and 60%, respectively. The
minimum net worth requirement as of December 31, 2009 was $950.6 million compared to Reliance
shareholders’ equity balance of $2.61 billion at December 31, 2009.
Additionally, all of our wholly-owned domestic subsidiaries, which constitute the substantial
majority of our subsidiaries, guarantee the borrowings under the revolving credit facility, the
Indenture and the private placement notes. The subsidiary guarantors also guaranteed the borrowings
under the term loan prior to its repayment and termination. The subsidiary guarantors, together
with Reliance, are required collectively to account for at least 80% of the Company’s consolidated
EBITDA and 80% of consolidated tangible assets. Reliance and the subsidiary guarantors accounted
for approximately 100% of our total 2009 consolidated EBITDA and approximately 93% of total 2009
consolidated tangible assets.
The Company was in compliance with all other debt covenants as of December 31, 2009.
58
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Debt Maturities
The following is a summary of aggregate maturities of long-term debt for each of the next five
years and thereafter:
| (in thousands) | ||||
2010 |
$ | 86,383 | ||
2011 |
68,615 | |||
2012 |
107,086 | |||
2013 |
75,300 | |||
2014 |
300 | |||
Thereafter |
600,000 | |||
| $ | 937,684 | |||
Note 9. Income Taxes
Reliance and its subsidiaries file numerous consolidated and separate income tax returns in
the United States federal jurisdiction and in many state and foreign jurisdictions. The Company is
no longer subject to U.S. federal, state and local tax examinations for years before 2005.
Significant components of the provision for income taxes attributable to operations are as
follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | (13,520 | ) | $ | 218,242 | $ | 194,225 | |||||
State |
2,946 | 35,211 | 32,966 | |||||||||
Foreign |
(1,125 | ) | 6,748 | 7,014 | ||||||||
| (11,699 | ) | 260,201 | 234,205 | |||||||||
Deferred: |
||||||||||||
Federal |
60,018 | 23,330 | 8,917 | |||||||||
State |
(3,054 | ) | (117 | ) | 1,113 | |||||||
Foreign |
1,052 | (493 | ) | 2,203 | ||||||||
| 58,016 | 22,720 | 12,233 | ||||||||||
| $ | 46,317 | $ | 282,921 | $ | 246,438 | |||||||
The reconciliation of income tax at the U.S. federal statutory tax rates to income tax
expense is as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Income tax at U.S. federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income tax, net of federal tax effect |
(0.6 | ) | 3.0 | 3.4 | ||||||||
Net effect of life insurance policies |
(6.3 | ) | (0.9 | ) | (1.3 | ) | ||||||
Net effect of changes in unrecognized tax benefits |
(5.8 | ) | 1.6 | (0.1 | ) | |||||||
Other, net |
1.4 | (1.8 | ) | 0.7 | ||||||||
Effective tax rate |
23.7 | % | 36.9 | % | 37.7 | % | ||||||
59
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Deferred tax assets: |
||||||||
Accrued expenses not currently deductible for tax |
$ | 50,435 | $ | 51,889 | ||||
Inventory costs capitalized for tax purposes |
8,839 | 16,936 | ||||||
LIFO inventories |
— | 23,169 | ||||||
Allowance for doubtful accounts |
8,071 | 7,732 | ||||||
Tax credits |
18,872 | 18,030 | ||||||
Net operating loss carryforwards |
8,111 | 3,880 | ||||||
Other |
16,569 | 12,546 | ||||||
Total gross deferred tax assets |
110,897 | 134,182 | ||||||
Less: Valuation allowance on deferred tax assets. |
(2,514 | ) | — | |||||
Total deferred tax assets |
108,383 | 134,182 | ||||||
Deferred tax liabilities: |
||||||||
Tax over book depreciation |
(126,977 | ) | (127,619 | ) | ||||
Goodwill and other intangible assets |
(276,109 | ) | (275,523 | ) | ||||
LIFO inventories |
(38,437 | ) | — | |||||
Other |
(516 | ) | (433 | ) | ||||
Total deferred tax liabilities |
(442,039 | ) | (403,575 | ) | ||||
Net deferred tax liabilities |
$ | (333,656 | ) | $ | (269,393 | ) | ||
During 2009, the Company recorded a $2.5 million valuation allowance against certain
state NOL’s in the United States, of which $1.3 million related to PNA’s pre-acquisition periods,
as there is uncertainty as to whether future taxable income will be generated for these deferred
tax assets to be realizable. The Company intends to maintain a valuation allowance until
sufficient positive evidence exists in future periods to support its reversal.
As of December 31, 2009, the Company had other available state NOL’s of $8.5 million to offset
future income taxes, expiring in years 2010 through 2029. Additionally, as of December 31, 2009,
the Company had $18.0 million of minimum tax credits and $0.9 million of other miscellaneous tax
credits. The minimum tax credits were from the acquisition of EMJ and are subject to an annual
limitation amount. The ultimate realization of the federal and state benefits of the credit
carryforwards are dependent on future profitable operations. The Company believes that it is more
likely than not that it will be able to realize these NOL’s and credits within their respective
carryforward periods.
Taxes on Foreign Income
As of December 31, 2009, unremitted earnings of subsidiaries outside of the United States were
approximately $77.2 million on which no United States taxes had been provided. The Company’s
current intention is to reinvest these earnings outside the United States. It is not practicable
to estimate the amount of additional taxes that might be payable upon repatriation of foreign
earnings.
Unrecognized Tax Benefits
The Company completed the audit of the pre-acquisition period of its recently acquired
subsidiaries with the IRS with no change. The Company is under audit by various state
jurisdictions but does not anticipate any material adjustments from these examinations.
Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax
benefits is as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Unrecognized tax benefits at January 1 |
$ | 23,417 | $ | 3,795 | $ | 5,026 | ||||||
Increases in tax positions for prior years |
2,820 | 15 | 14 | |||||||||
Decreases in tax positions for prior years |
(3,611 | ) | (63 | ) | (1,301 | ) | ||||||
Increases in tax positions for current year |
2,882 | 20,073 | 479 | |||||||||
Settlements |
(1,291 | ) | — | (341 | ) | |||||||
Lapses in statutes-of-limitation periods |
(8,730 | ) | (403 | ) | (82 | ) | ||||||
Unrecognized tax benefits as of December 31 |
$ | 15,487 | $ | 23,417 | $ | 3,795 | ||||||
60
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
As of December 31, 2009, $15.5 million of unrecognized tax benefits would impact the effective
tax rate if recognized. Accrued interest and penalties, net of applicable tax effect, related to
uncertain tax positions were approximately $1.2 million and $2.6 million as of December 31, 2009
and 2008, respectively.
Note 10. Stock Option Plans
In May 2004, the Board of Directors of the Company (the “Board”) adopted, and the shareholders
approved, an Incentive and Non-Qualified Stock Option Plan (the “2004 Plan”). This 2004 Plan
reserved 6,000,000 shares of the Company’s Common Stock for issuance upon exercise of stock options
granted under the 2004 Plan. On May 17, 2006, the 2004 Plan was amended and restated as the
Amended and Restated Stock Option and Restricted Stock Plan to allow the Board to extend the term
of subsequently granted stock options to up to 10 years, to increase the number of shares available
for future grants of options or restricted stock from 6,000,000 shares to 10,000,000 shares, and to
provide for the grant of restricted shares of the Company’s common stock, in addition to or in lieu
of stock options. There are 8,757,000 common shares available for issuance with 3,584,975
non-qualified stock options granted and outstanding under the 2004 Plan as of December 31, 2009.
The 2004 Plan, as amended, provides for granting of stock options that may be either “incentive
stock options” within the meaning of Section 422A of the Code or “non-qualified stock options,”
which do not satisfy the provisions of Section 422A of the Code. Options are required to be
granted at an option price per share not less than the fair market value of common stock on the
date of grant, except that the exercise price of incentive stock options granted to any employee
who owns (or, under pertinent Code provisions, is deemed to own) more than 10% of the outstanding
common stock of the Company, must equal at least 110% of fair market value on the date of grant.
Stock options cannot be granted longer than ten years from the date of the plan. All options
outstanding as of December 31, 2009 have seven-year terms with the exception of the October 2005
grants, which have five-year terms, and all options vest at the rate of 25% per year, commencing
one year from the date of grant.
In May 1998, the shareholders approved the adoption of a Directors Stock Option Plan for
non-employee directors (the “Directors Plan”), which provides for automatic grants of options to
non-employee directors. In February 1999, the Directors Plan was amended to allow the Board
authority to grant additional options to acquire the Company’s common stock to non-employee
directors. In May 2004 the Directors Plan was amended so that any unexpired stock options granted
under the Directors Plan to a non-employee director that retires from the Board of Directors at or
after the age of 75 become immediately vested and exercisable, and the director, if he or she so
desires, must exercise those options within ninety (90) days after such retirement or the options
shall expire automatically. In May 2005, after approval of the Company’s shareholders, the
Directors Plan was further amended and restated providing that options to acquire 6,000 shares of
Common Stock would be automatically granted to each non-employee director each year and would
become 100% exercisable after one year. Once exercisable, the options would remain exercisable
until that date that is ten years after the date of grant. In addition, the amendment increased the
number of shares available for future grants of options from the 374,000 shares reserved as of May
2005 to 500,000 shares. Options under the Directors Plan are non-qualified stock options, with an
exercise price at least equal to fair market value at the date of grant. All options outstanding
as of December 31, 2009 have ten-year terms with the exception of the options granted prior to May
2005, which expire five years from the date of grant. None of these stock options becomes
exercisable until one year after the date of grant, unless specifically approved by the Board. As
of December 31, 2009, there were 371,000 common shares available for issuance with 156,000 options
granted and outstanding under the Directors Plan.
In connection with the EMJ acquisition, the Company assumed the EMJ incentive stock option
plan (“EMJ Plan”) and converted the outstanding EMJ options to options to acquire 287,886 shares of
Reliance common stock on the same terms and conditions as were applicable to such options under the
EMJ Plan, with adjusted exercise prices and numbers of shares to reflect the difference in the
value of the stock. The exchange of the options was accounted for similar to a modification. The
value of the vested options assumed was included as part of the EMJ purchase price and the value of
the unvested options was recognized to expense over the remaining vesting periods of the respective
options. Options granted under the EMJ Plan have ten-year terms and vest at the rate of 25% per
year. As of December 31, 2009, there were 68,254 options outstanding under the EMJ Plan, all of
which became fully vested as of March 31, 2009.
61
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Stock option activity under all the plans is as follows:
| Weighted Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted Average | Contractual Term | Intrinsic Value | ||||||||||||||
| Stock Options | Shares | Exercise Price | (In years) | (In thousands) | ||||||||||||
Outstanding at January 1, 2007 |
3,007,412 | $ | 21.54 | |||||||||||||
Granted |
1,068,500 | $ | 45.51 | |||||||||||||
Exercised |
(872,001 | ) | $ | 18.90 | ||||||||||||
Expired or forfeited |
(51,656 | ) | $ | 29.57 | ||||||||||||
Outstanding as of December 31, 2007 |
3,152,255 | $ | 30.27 | |||||||||||||
Granted |
1,174,000 | $ | 57.14 | |||||||||||||
Exercised |
(844,338 | ) | $ | 21.31 | ||||||||||||
Expired or forfeited |
(63,145 | ) | $ | 37.87 | ||||||||||||
Outstanding as of December 31, 2008 |
3,418,772 | $ | 41.57 | |||||||||||||
Granted |
977,300 | $ | 33.86 | |||||||||||||
Exercised |
(427,697 | ) | $ | 24.53 | ||||||||||||
Expired or forfeited |
(159,146 | ) | $ | 48.35 | ||||||||||||
Outstanding as of December 31, 2009 |
3,809,229 | $ | 41.22 | 4.5 | $ | 26,284 | ||||||||||
Exercisable as of December 31, 2009 |
1,591,379 | $ | 36.80 | 3.0 | $ | 16,475 | ||||||||||
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model using the following weighted average assumptions:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Weighted average assumptions used: |
||||||||||||
Risk free interest rate |
1.87 | % | 2.90 | % | 4.50 | % | ||||||
Expected life in years |
4.8 | 4.8 | 4.8 | |||||||||
Expected volatility |
.59 | .38 | .40 | |||||||||
Expected dividend yield |
1.18 | % | .70 | % | .71 | % | ||||||
Weighted average grant date fair value |
$ | 15.58 | $ | 19.78 | $ | 17.43 | ||||||
The total intrinsic values of all options exercised during the years ended December 31,
2009, 2008 and 2007 were $6.9 million, $31.4 million and $28.1 million, respectively.
A summary of the status of the Company’s non-vested stock options as of December 31, 2009 and
changes during the year then ended is as follows:
| Weighted Average Grant | ||||||||
| Non-vested Options | Shares | Date Fair Value | ||||||
Non-vested as of December 31, 2008 |
2,415,296 | $ 16.60 | ||||||
Granted |
977,300 | $ 15.58 | ||||||
Forfeited or expired |
(105,271 | ) | $ 18.01 | |||||
Vested |
(1,069,475 | ) | $ 14.01 | |||||
Non-vested as of December 31, 2009 |
2,217,850 | $ 17.33 | ||||||
As of December 31, 2009, there was approximately $28.0 million of total unrecognized
compensation cost related to non-vested share-based compensation awards granted under the stock
option plans. That cost is expected to be recognized over approximately a 3-year period or a
weighted average period of 2.5 years.
Proceeds from option exercises under all stock option plans for the years ended December 31,
2009, 2008 and 2007 were $10.5 million, $18.0 million and $16.5 million, respectively. The tax
benefit realized from option exercises during the years ended December 31, 2009, 2008 and 2007 were
$2.7 million, $11.2 million and $10.7 million, respectively.
The following tabulation summarizes certain information concerning outstanding and exercisable
options as of December 31, 2009:
62
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
| Options Outstanding | ||||||||||||||||||||
| Weighted Average | Options Exercisable | |||||||||||||||||||
| Remaining | Weighted | Average Exercise | ||||||||||||||||||
| Range of | Outstanding at | Contractual Life | Average | Exercisable at | Price of Options | |||||||||||||||
| Exercise Price | December 31, 2009 | In Years | Exercise Price | December 31, 2009 | Exercisable | |||||||||||||||
$15 — $19
|
24,000 | 5.4 | $ | 18.31 | 24,000 | $ | 18.31 | |||||||||||||
$24 — $28
|
821,004 | 1.2 | $ | 24.62 | 821,004 | $ | 24.62 | |||||||||||||
$33 — $38
|
963,600 | 6.4 | $ | 33.86 | — | N/A | ||||||||||||||
$43 — $45
|
865,125 | 4.2 | $ | 44.81 | 411,875 | $ | 44.75 | |||||||||||||
$56 — $57
|
1,069,500 | 5.2 | $ | 56.80 | 268,500 | $ | 56.80 | |||||||||||||
$61 — $67
|
66,000 | 7.9 | $ | 64.03 | 66,000 | $ | 64.03 | |||||||||||||
$15 — $67
|
3,809,229 | 4.5 | $ | 41.22 | 1,591,379 | $ | 36.80 | |||||||||||||
Note 11. Employee Benefits
Employee Stock Ownership Plan
The Company has an employee stock ownership plan (the “ESOP”) and trust that has been approved
by the Internal Revenue Service as a qualified plan. The ESOP is a noncontributory plan that
covers certain salaried and hourly employees of the Company. The amount of the annual contribution
is at the discretion of the Board, except that the minimum amount must be sufficient to enable the
ESOP trust to meet its current obligations.
Defined Contribution Plans
Effective in 1998, the Reliance Steel & Aluminum Co. Master 401(k) Plan (the “Master Plan”)
was established, which combined several of the various 401(k) and profit-sharing plans of the
Company and its subsidiaries into one plan. Salaried and certain hourly employees of the Company
and its participating subsidiaries are covered under the Master Plan. The Master Plan allows each
subsidiary’s Board to determine independently the annual matching percentage and maximum
compensation limits or annual profit-sharing contribution. Eligibility occurs after three months
of service, and the Company contribution vests at 25% per year, commencing one year after the
employee enters the Master Plan. Other 401(k) and profit-sharing plans exist as certain
subsidiaries have not combined their plans into the Master Plan as of December 31, 2009. Various
defined contribution plans of Reliance subsidiaries were combined into the Master Plan during 2009.
Supplemental Executive Retirement Plans
Effective January 1996, the Company adopted a Supplemental Executive Retirement Plan (“SERP”),
which is a nonqualified pension plan that provides postretirement pension benefits to certain key
officers of the Company. The SERP is administered by the Compensation and Stock Option Committee
of the Board. Benefits are based upon the employees’ earnings. Effective January 1, 2009, the SERP
was amended to freeze the plan to new participants as well as change the benefit formula. The
amendment resulted in a net reduction to the benefit obligation under this plan of approximately
$2.9 million. Life insurance policies were purchased for most individuals covered by the SERP and
are funded by the Company. Separate SERP’s exist for certain wholly-owned subsidiaries of the
Company, each of which provides postretirement pension benefits to certain current and former key
employees. All of the subsidiary plans have been frozen to include only existing participants.
The SERP’s do not maintain their own plan assets, therefore plan assets and related disclosures
have been omitted. However, the Company does maintain on its balance sheet assets to fund the
SERP’s with values of $13.7 million and $11.8 million as of December 31, 2009 and 2008,
respectively.
Deferred Compensation Plan
In December 2008, a new deferred compensation plan was put in place for certain officers and
key employees of the Company, not including, however, those key officers included in the SERP.
Account balances from various deferred compensation plans of subsidiaries were transferred and
consolidated into this new deferred compensation plan. The balances in the Reliance deferred
compensation plan as of December 31, 2009 and 2008 were approximately $7.9 million and $6.0
million, respectively.
Defined Benefit Plans
The Company, through certain of its subsidiaries, maintains qualified defined benefit pension
plans for certain of its employees. These plans generally provide benefits of stated amounts for
each year of service or provide benefits based on the
63
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
participant’s hourly wage rate and years of service. The plans permit the sponsor, at any
time, to amend or terminate the plans subject to union approval, if applicable.
The Company uses a December 31 measurement date for its plans. The following is a summary of
the status of the funding of the various SERP’s and Defined Benefit Plans:
| SERP’s | Defined Benefit Plans | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 30,754 | $ | 28,295 | $ | 48,443 | $ | 26,884 | ||||||||
Assumed in acquisition |
— | 1,954 | — | 16,445 | ||||||||||||
Service cost |
777 | 1,003 | 752 | 696 | ||||||||||||
Interest cost |
1,674 | 1,688 | 2,902 | 2,179 | ||||||||||||
Actuarial losses (gain) |
1,112 | (640 | ) | 1,881 | 2,332 | |||||||||||
Change in assumptions |
— | 4 | — | 927 | ||||||||||||
Benefits paid |
(902 | ) | (784 | ) | (1,969 | ) | (1,479 | ) | ||||||||
Plan amendments |
(2,905 | ) | 1,909 | 117 | 459 | |||||||||||
Curtailments or settlements |
(30 | ) | (2,675 | ) | — | — | ||||||||||
Benefit obligation as of end of year |
$ | 30,480 | $ | 30,754 | $ | 52,126 | $ | 48,443 | ||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets |
N/A | N/A | $ | 32,498 | $ | 25,446 | ||||||||||
Acquired in acquisition |
N/A | N/A | — | 14,877 | ||||||||||||
Actual return on plan assets |
N/A | N/A | 6,788 | (8,554 | ) | |||||||||||
Employer contributions |
N/A | N/A | 4,328 | 2,208 | ||||||||||||
Benefits paid |
N/A | N/A | (2,009 | ) | (1,479 | ) | ||||||||||
Fair value of plan assets as of end of year |
N/A | N/A | $ | 41,605 | $ | 32,498 | ||||||||||
Funded status |
||||||||||||||||
Unfunded status of the plans |
$ | (30,480 | ) | $ | (30,754 | ) | $ | (10,521 | ) | $ | (15,945 | ) | ||||
Items not yet recognized as component of net periodic pension expense |
||||||||||||||||
Unrecognized net actuarial losses |
$ | 8,910 | $ | 8,822 | $ | 9,438 | $ | 12,584 | ||||||||
Unamortized prior service (credit) cost |
(2,488 | ) | — | 447 | 397 | |||||||||||
| $ | 6,422 | $ | 8,822 | $ | 9,885 | $ | 12,981 | |||||||||
As of December 31, 2009 and 2008, the following amounts were recognized in the balance
sheet:
| SERP's | Defined Benefit Plans | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
Amounts recognized in the statement
of financial position |
||||||||||||||||
Accrued benefit liability (current) |
$ | (1,116 | ) | $ | (1,195 | ) | $ | — | $ | — | ||||||
Accrued benefit liability (long-term) |
(29,364 | ) | (29,558 | ) | (10,521 | ) | (15,945 | ) | ||||||||
Accumulated other comprehensive loss |
6,422 | 8,822 | 9,885 | 12,981 | ||||||||||||
Net amount recognized |
$ | (24,058 | ) | $ | (21,931 | ) | $ | (636 | ) | $ | (2,964 | ) | ||||
The accumulated benefit obligation for all SERP’s was $23.6 million and $16.9 million as
of December 31, 2009 and 2008, respectively. The accumulated benefit obligation for all defined
benefit pension plans was $52.1 million and $48.4 million as of December 31, 2009 and 2008,
respectively.
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Information for defined benefit plans
with an accumulated benefit obligation
and projected benefit obligation in
excess of plan assets |
||||||||
Accumulated benefit obligation |
$ | 49,318 | $ | 48,443 | ||||
Projected benefit obligation |
49,318 | 48,443 | ||||||
Fair value of plan assets |
38,522 | 32,498 | ||||||
64
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Following are the details of net periodic benefit cost related to the SERP and Defined
Benefit Plans:
| SERP’s | Defined Benefit Plans | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
Service cost |
$ | 777 | $ | 1,003 | $ | 964 | $ | 752 | $ | 696 | $ | 795 | ||||||||||||
Interest cost |
1,674 | 1,688 | 1,568 | 2,902 | 2,179 | 1,586 | ||||||||||||||||||
Expected return on plan assets |
— | — | — | (2,718 | ) | (2,566 | ) | (1,813 | ) | |||||||||||||||
Curtailment/settlement expense |
30 | 1,909 | — | 174 | — | 221 | ||||||||||||||||||
Prior service cost |
(447 | ) | 196 | 196 | 67 | 63 | 16 | |||||||||||||||||
Amortization of net loss |
1,023 | 1,119 | 1,251 | 824 | 6 | 14 | ||||||||||||||||||
| $ | 3,057 | $ | 5,915 | $ | 3,979 | $ | 2,001 | $ | 378 | $ | 819 | |||||||||||||
Assumptions used to determine net periodic benefit cost are detailed below:
| SERP’s | Defined Benefit Plans | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
Weighted average assumptions to determine net
cost |
||||||||||||||||||||||||
Discount rate |
6.01 | % | 6.01 | % | 6.00 | % | 6.06 | % | 6.28 | % | 5.60 | % | ||||||||||||
Expected long-term rate of return on plan assets |
N/A | N/A | N/A | 8.04 | % | 8.02 | % | 8.23 | % | |||||||||||||||
Rate of compensation increase |
6.00 | % | 5.94 | % | 5.92 | % | N/A | N/A | N/A | |||||||||||||||
Assumptions used to determine the benefit obligation as of December 31 are detailed
below:
| SERP’s | Defined Benefit Plans | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average assumptions to determine
benefit obligations |
||||||||||||||||
Discount rate |
5.99 | % | 6.02 | % | 5.95 | % | 6.10 | % | ||||||||
Expected long-term rate of return on plan assets |
N/A | N/A | 8.04 | % | 8.02 | % | ||||||||||
Rate of compensation increase |
6.00 | % | 5.94 | % | N/A | N/A | ||||||||||
Employer contributions to the SERP’s and Defined Benefit Plans during 2010 are expected
to be $1.3 million and $3.7 million, respectively.
Plan Assets and Investment Policy
The weighted-average asset allocations of the Company’s Defined Benefit Plans by asset
category are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
Plan Assets |
||||||||
Equity securities |
62 | % | 56 | % | ||||
Debt securities |
35 | % | 39 | % | ||||
Other |
3 | % | 5 | % | ||||
Total |
100 | % | 100 | % | ||||
Plan assets are invested in various asset classes that are expected to produce a
sufficient level of diversification and investment return over the long term. The investment goal
is a return on assets that is at least equal to the assumed actuarial rate of return over the long
term within reasonable and prudent levels of risk. Investment policies reflect the unique
circumstances of
the respective plans and include requirements designed to mitigate risk including quality and
diversification standards. Asset allocation targets are reviewed periodically with investment
advisors to determine the appropriate investment strategies for acceptable risk levels. The
Company’s target allocation ranges are as follows: equity securities 50% to 80%, debt securities
20% to 60% and other assets of 0% to 10%. The Company establishes its estimated long-term return on
plan assets considering various factors including the targeted asset allocation percentages,
historic returns and expected future returns.
65
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
The fair value measurements of the Company’s Defined Benefit Plan assets fall within the
following levels of the fair value hierarchy as of December 31, 2009:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 551 | $ | — | $ | — | $ | 551 | ||||||||
U.S. Government and corporate debt securities (1) |
— | 12,662 | — | 12,662 | ||||||||||||
Common stock (2) |
18,993 | — | — | 18,993 | ||||||||||||
Mutual funds (3) |
9,399 | — | — | 9,399 | ||||||||||||
| $ | 28,943 | $ | 12,662 | $ | — | $ | 41,605 | |||||||||
| (1) | Valued using a combination of inputs including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. | |
| (2) | Comprised of primarily large domestic and international securities. Valued at the closing price reported on the active market on which the individual securities are traded. | |
| (3) | Comprised of exchange traded funds, money market funds, and stock and bond funds. Valued at closing price for exchange traded funds and Net Asset Value (NAV) for open-end and closed-end mutual funds. |
Postretirement Medical Plan
In addition to the Company’s Defined Benefit Pension Plans, the Company’s wholly-owned
subsidiary EMJ sponsors a defined benefit health care plan that provides postretirement medical and
dental benefits to eligible full time employees and their dependents (the “Postretirement Plan”).
The Postretirement Plan is fully insured, with retirees paying a percentage of the annual premium.
Such premiums are adjusted annually based on age and length of service of active and retired
participants. The Postretirement Plan contains other cost-sharing features such as deductibles and
coinsurance. The Company recognizes the cost of future benefits earned by participants during their
working careers, as determined using actuarial assumptions. Gains and losses realized from the
remeasurement of the plan’s benefit obligation are amortized to income over the expected service
period of the participants. The Company uses a measurement date of December 31 for its
Postretirement Plan.
Components of the net periodic pension expense associated with the Postretirement Plan are as
follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Service cost |
$ | 826 | $ | 752 | $ | 764 | ||||||
Interest cost |
773 | 752 | 610 | |||||||||
Amortization of net loss |
123 | 172 | 201 | |||||||||
| $ | 1,722 | $ | 1,676 | $ | 1,575 | |||||||
The following tables provide a reconciliation of the changes in the benefit obligation
and the unfunded status of the Postretirement Plan as follows:
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Change in Benefit Obligation |
||||||||
Benefit obligation at beginning of year. |
$ | 14,016 | $ | 11,487 | ||||
Service cost |
826 | 752 | ||||||
Interest cost |
773 | 752 | ||||||
Benefit payments |
(335 | ) | (162 | ) | ||||
Change in assumptions |
345 | 732 | ||||||
Actuarial (gain) loss |
(1,240 | ) | 455 | |||||
Benefit obligation at end of year |
$ | 14,385 | $ | 14,016 | ||||
Unfunded status |
$ | (14,385 | ) | $ | (14,016 | ) | ||
66
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Amounts recognized in the statement of financial position |
||||||||
Accrued benefit liability (current) |
$ | (541 | ) | $ | (528 | ) | ||
Accrued benefit liability (long-term) |
(13,844 | ) | (13,488 | ) | ||||
Accumulated other comprehensive loss |
2,975 | 3,993 | ||||||
Net amount recognized |
$ | (11,410 | ) | $ | (10,023 | ) | ||
Item not yet recognized as component of net periodic pension expense |
||||||||
Unrecognized net actuarial losses |
$ | 2,975 | $ | 3,993 | ||||
Assumptions used to determine net periodic benefit are detailed below:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Weighted average assumptions to determine net cost |
||||||||||||
Discount rate |
6.00 | % | 6.25 | % | 5.50 | % | ||||||
Health care cost trend rate |
10.00 | % | 10.00 | % | 11.00 | % | ||||||
Rate to which the cost trend rate is assumed to decline |
6.00 | % | 6.00 | % | 6.00 | % | ||||||
Year that the rate reaches the ultimate trend rate |
2013 | 2012 | 2012 | |||||||||
Assumptions used to determine the benefit obligation are detailed below:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
Weighted average assumptions to determine benefit
obligations |
||||||||
Discount rate |
6.00 | % | 6.00 | % | ||||
Health care cost trend rate |
10.00 | % | 10.00 | % | ||||
Rate to which the cost trend rate is assumed to decline |
6.00 | % | 6.00 | % | ||||
Year that the rate reaches the ultimate trend rate |
2013 | 2012 | ||||||
A one-percentage-point change in assumed health care cost trend rates would have the
following effects:
| Year Ended December 31, 2009 | Year Ended December 31, 2008 | |||||||||||||||
| 1% Increase | 1% Decrease | 1% Increase | 1% Decrease | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
Effect on total service and interest cost components |
$ | 236 | $ | (199 | ) | $ | 221 | $ | (186 | ) | ||||||
Effect on postretirement benefit obligation |
1,738 | (1,499 | ) | 1,655 | (1,427 | ) | ||||||||||
Summary Disclosures for All Defined Benefit Plans
The following is a summary of benefit payments under the Company’s various defined benefit
plans, which reflect expected future employee service, as appropriate, expected to be paid in the
periods indicated:
| Defined | Post Retirement | |||||||||||
| SERP’s | Benefit Plans | Medical Plan | ||||||||||
| (in thousands) | ||||||||||||
2010 |
$ | 1,329 | $ | 1,972 | $ | 557 | ||||||
2011 |
1,322 | 2,169 | 623 | |||||||||
2012 |
1,211 | 2,336 | 673 | |||||||||
2013 |
1,200 | 2,481 | 621 | |||||||||
2014 |
1,341 | 2,598 | 752 | |||||||||
2015 — 2019 |
11,919 | 15,958 | 5,884 | |||||||||
67
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
The amounts in accumulated other comprehensive income that are expected to be recognized
as components of net periodic benefit cost during 2010 are as follows:
| Defined | Post Retirement | |||||||||||
| SERP’s | Benefit Plans | Medical Plan | ||||||||||
| (in thousands) | ||||||||||||
Actuarial loss |
$ | 934 | $ | 319 | $ | 118 | ||||||
Prior service cost |
(467 | ) | 79 | — | ||||||||
Total |
$ | 467 | $ | 398 | $ | 118 | ||||||
Supplemental Bonus Plan
In 2005, EMJ reached a settlement with the U.S. Department of Labor regarding a change in its
methodology for annual valuations of its stock while it was a private company, for the purpose of
making contributions in stock to its retirement plan. This resulted in a special additional
contribution to the plan in shares of EMJ common stock to be made over a two-year period. In
connection with the acquisition of EMJ in April 2006, Reliance assumed the obligation resulting
from EMJ’s settlement with the U.S. Department of Labor to contribute 258,006 shares of Reliance
common stock to EMJ’s Supplemental Bonus Plan, a phantom stock bonus plan supplementing the EMJ
Retirement Savings Plan. As of December 31, 2009, the remaining obligation to the EMJ Supplemental
Bonus Plan consisted of the cash equivalent of 145,336 shares of Reliance common stock totaling
approximately $6.6 million. The adjustments to reflect this obligation at fair value based on the
closing price of the Company common stock at the end of each reporting period are included in
Warehouse, delivery, selling, general and administrative expense. The expense (income) from mark
to market adjustments to this obligation in each of the three year periods ended December 31, 2009
amounted to approximately $3.5 million, ($5.1) million and $2.4 million, respectively. This
obligation will be satisfied by future cash payments to participants upon their termination of
employment.
Contributions to Company Sponsored Retirement Plans
The Company’s expense for Company-sponsored retirement plans was as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Master Plan |
$ | 13,347 | $ | 16,356 | $ | 8,970 | ||||||
Other Defined Contribution Plans |
1,359 | 7,299 | 10,020 | |||||||||
Employee Stock Ownership Plan |
1,200 | 1,100 | 1,100 | |||||||||
Deferred Compensation Plan |
1,413 | 583 | — | |||||||||
Supplemental Executive Retirement Plans |
3,057 | 5,915 | 3,979 | |||||||||
Defined Benefit Plans |
2,001 | 378 | 819 | |||||||||
Post-Retirement Medical Plan |
1,722 | 1,676 | 1,575 | |||||||||
| $ | 24,099 | $ | 33,307 | $ | 26,463 | |||||||
Note 12. Consolidated Equity
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, no par value per share.
The Company paid regular quarterly cash dividends on its common stock in 2009. The Company’s Board
of Directors increased the quarterly dividend to $.10 per share of common stock in February 2008
from $.08 per share. The holders of Reliance common stock are entitled to one vote per share on
each matter submitted to a vote of shareholders; however, under California law, for the election of
members of the Board of Directors shareholders are entitled to cumulative voting rights.
Share Repurchase Program
In May 2005, our Board of Directors amended and restated our stock repurchase program
authorizing the repurchase of up to an additional 12,000,000 shares of our common stock, of which
7,883,033 shares remain available for repurchase as of December 31, 2009. No shares were
repurchased during 2009. During 2008 and 2007, the Company repurchased 2,443,500 and
68
RELIANCE STEEL & ALUMINUM CO.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
1,673,467 shares of its common stock at an average cost of $46.97 and $49.10 per share,
respectively. Repurchased shares are redeemed and treated as authorized but unissued shares.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, no par value per
share. No shares of the Company’s preferred stock are issued and outstanding. The Company’s
restated articles of incorporation provide that shares of preferred stock may be issued from time
to time in one or more series by the Board. The Board can fix the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of each series of preferred stock. The rights of preferred shareholders
may supersede the rights of common shareholders.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) included the following:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Net Income |
$ | 149,176 | $ | 483,635 | $ | 408,289 | ||||||
Other comprehensive income (loss): |
||||||||||||
Foreign currency translation gain (loss) |
25,870 | (42,624 | ) | 24,681 | ||||||||
Unrealized gain (loss) on investments, net of tax |
524 | (1,163 | ) | (54 | ) | |||||||
Minimum pension liability, net of tax |
4,099 | (8,474 | ) | (2,751 | ) | |||||||
Total other comprehensive gain (loss) |
30,493 | (52,261 | ) | 21,876 | ||||||||
Comprehensive income |
179,669 | 431,374 | 430,165 | |||||||||
Comprehensive income attributable to the noncontrolling interests |
(1,018 | ) | (858 | ) | (334 | ) | ||||||
Comprehensive income attributable to Reliance |
$ | 178,651 | $ | 430,516 | $ | 429,831 | ||||||
Accumulated Other Comprehensive Loss
Comprehensive income (loss) are non-stockholder changes in equity. Accumulated other
comprehensive (loss) income included the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Foreign currency translation gain (loss) |
$ | 10,648 | $ | (15,222 | ) | |||
Unrealized loss on investments, net of tax |
(448 | ) | (972 | ) | ||||
Minimum pension liability, net of tax |
(11,723 | ) | (15,822 | ) | ||||
Total accumulated other comprehensive loss |
$ | (1,523 | ) | $ | (32,016 | ) | ||
Foreign currency translation adjustments generally are not adjusted for income taxes as
they relate to indefinite investments in foreign subsidiaries. The adjustments to unrealized loss
on investments and minimum pension liability are net of deferred income tax assets of $0.3 million
and $7.3 million, respectively, as of December 31, 2009 and $0.5 million and $9.8 million,
respectively, as of December 31, 2008.
69
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Note 13. Other Income (Expense), net
Significant components of Other income (expense), net are as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
Interest and dividend income from life insurance policies |
$ | 34,666 | $ | 27,314 | $ | 27,996 | ||||||
Interest expense on life insurance policy loans |
(31,685 | ) | (29,175 | ) | (28,895 | ) | ||||||
Life insurance policy premium expense |
(4,720 | ) | (4,940 | ) | (4,812 | ) | ||||||
Income from life insurance policy redemptions |
5,201 | 1,422 | 1,093 | |||||||||
Foreign currency exchange gains (losses) |
244 | (5,957 | ) | 7,337 | ||||||||
Rental income |
3,138 | 3,737 | 1,933 | |||||||||
Interest income |
1,417 | 2,063 | 2,628 | |||||||||
Equity in earnings of unconsolidated entities |
1,395 | 565 | — | |||||||||
All other, net |
2,968 | 1,131 | 2,651 | |||||||||
| $ | 12,624 | $ | (3,840 | ) | $ | 9,931 | ||||||
Note 14. Commitments and Contingencies
Lease Commitments
The Company leases land, buildings and equipment under non-cancelable operating leases
expiring in various years through 2031. Rent expense for leases that contain scheduled rent
increases are recorded on a straight-line basis. Several of the leases have renewal options
providing for additional lease periods. Future minimum payments, by year and in the aggregate,
under the non-cancelable leases with initial or remaining terms of one year or more, consisted of
the following as of December 31, 2009:
| Operating | Capital | |||||||
| Leases | Leases | |||||||
| (in thousands) | ||||||||
2010 |
$ | 57,328 | $ | 814 | ||||
2011 |
47,243 | 805 | ||||||
2012 |
38,066 | 780 | ||||||
2013 |
29,076 | 780 | ||||||
2014 |
22,726 | 759 | ||||||
Thereafter |
105,639 | 338 | ||||||
| $ | 300,078 | $ | 4,276 | |||||
Less interest |
(431 | ) | ||||||
Capital lease obligations |
3,845 | |||||||
Less current portion |
(663 | ) | ||||||
Long-term capital lease obligations |
$ | 3,182 | ||||||
Total rental expense amounted to $75.8 million, $68.3 million and $61.1 million, for
2009, 2008 and 2007, respectively.
Included in the amounts above for operating leases are lease payments to various related
parties, who are not executive officers of the Company, in the amounts of $3.7 million, $3.7
million and $3.3 million for 2009, 2008 and 2007, respectively. These related party leases are for
buildings leased to certain of the companies we have acquired and expire in various years through
2021.
Collective Bargaining Agreements
As of December 31, 2009, approximately 11% of the Company’s total employees are covered by
collective bargaining agreements, which expire at various times over the next four years.
Approximately 7% of the Company’s employees are covered by 22 different collective bargaining
agreements that expire during 2010.
70
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Environmental Contingencies
The Company is subject to extensive and changing federal, state, local and foreign laws and
regulations designed to protect the environment, including those relating to the use, handling,
storage, discharge and disposal of hazardous substances and the remediation of environmental
contamination. The Company’s operations use minimal amounts of such substances.
The Company believes it is in material compliance with laws and regulations, however, the
Company is from time to time involved in administrative and judicial proceedings and inquiries
relating to environmental matters. Some of the Company’s owned or leased properties are located in
industrial areas with histories of heavy industrial use. The Company may incur some environmental
liabilities because of the location of these properties. In addition, the Company is currently
investigating and remediating contamination at certain properties that it has acquired or that
acquired subsidiaries own or previously owned, but the Company does not expect these liabilities to
have a material adverse impact on the financial position, results of operations or cash flows of
the Company.
Legal Matters
The Company is subject to legal proceedings and claims which arise in the ordinary course of
its business. Although occasional adverse decisions or settlements may occur, the potential loss,
if any, cannot be reasonably estimated. However, the Company believes that the final disposition
of such matters will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company. The Company maintains various liability insurance
coverages to protect the Company’s assets from losses arising out of or involving activities
associated with ongoing and normal business operations.
Note 15. Earnings Per Share
The Company calculates basic and diluted earnings per share as required by the Earnings Per
Share topic of the FASB Codification. Basic earnings per share exclude any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share are calculated including
the dilutive effects of warrants, options, and convertible securities, if any.
The following table sets forth the computation of basic and diluted earnings per share:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
Numerator: |
||||||||||||
Net income attributable to Reliance |
$ | 148,158 | $ | 482,777 | $ | 407,955 | ||||||
Denominator: |
||||||||||||
Denominator for basic earnings per share —
Weighted average shares |
73,446 | 73,102 | 75,623 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
256 | 496 | 442 | |||||||||
Denominator for dilutive earnings per share: |
||||||||||||
Adjusted weighted average shares and
assumed conversions |
73,702 | 73,598 | 76,065 | |||||||||
Net income per share attributable to Reliance shareholders — diluted |
$ | 2.01 | $ | 6.56 | $ | 5.36 | ||||||
Net income per share attributable to Reliance shareholders — basic |
$ | 2.02 | $ | 6.60 | $ | 5.39 | ||||||
The computations of earnings per share for the years ended December 31, 2009, 2008 and
2007 do not include approximately 3,109,197, 2,311,000 and 1,055,000 shares reserved for issuance
upon exercise of stock options, respectively, because their inclusion would have been
anti-dilutive.
71
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Note 16. Condensed Consolidating Financial Statements
In November 2006, the Company issued senior unsecured notes in the aggregate principal amount
of $600 million at fixed interest rates that are guaranteed by its wholly-owned domestic
subsidiaries. The accompanying combined and consolidating financial information has been prepared
and presented pursuant to Rule 3-10 of SEC Regulation S-X “Financial Statements of Guarantors and
Issuers of Guaranteed Securities Registered or Being Registered.” The guarantees are full and
unconditional and joint and several obligations of each of the guarantor subsidiaries. There are no
significant restrictions on the ability of the Company to obtain funds from any of the guarantor
subsidiaries by dividends or loan. The supplemental consolidating financial information has been
presented in lieu of separate financial statements of the guarantors as such separate financial
statements are not considered meaningful.
Effective January 1, 2009, RSAC Management Corp., a wholly-owned subsidiary of Reliance, was
merged with and into Reliance. The results of RSAC Management Corp. are now reflected as part of
the Parent in these condensed consolidating financial statements. In accordance with SEC rules,
prior period amounts were retroactively restated for this change in the guarantors.
72
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Balance Sheet
As of December 31, 2009
(in thousands)
As of December 31, 2009
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | Eliminations & | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Reclassifications | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 8,968 | $ | 6,890 | $ | 27,144 | $ | — | $ | 43,002 | ||||||||||
Accounts receivable, less allowance for
doubtful accounts |
48,344 | 451,234 | 34,293 | — | 533,871 | |||||||||||||||
Inventories |
27,791 | 646,343 | 45,781 | — | 719,915 | |||||||||||||||
Intercompany receivables |
300 | 15,845 | 1,940 | (18,085 | ) | — | ||||||||||||||
Income taxes receivable |
52,021 | — | 1,999 | — | 54,020 | |||||||||||||||
Prepaid expenses and other current assets |
6,500 | 30,544 | 3,052 | — | 40,096 | |||||||||||||||
Total current assets |
143,924 | 1,150,856 | 114,209 | (18,085 | ) | 1,390,904 | ||||||||||||||
Investments in subsidiaries |
1,642,191 | 155,039 | 612 | (1,797,842 | ) | — | ||||||||||||||
Property, plant and equipment, net |
92,706 | 840,606 | 47,947 | — | 981,259 | |||||||||||||||
Goodwill |
23,780 | 1,002,775 | 54,769 | — | 1,081,324 | |||||||||||||||
Intangible assets, net |
13,276 | 650,784 | 62,195 | — | 726,255 | |||||||||||||||
Intercompany receivables |
1,857,443 | — | — | (1,857,443 | ) | — | ||||||||||||||
Other assets |
4,282 | 121,883 | 870 | — | 127,035 | |||||||||||||||
Total assets |
$ | 3,777,602 | $ | 3,921,943 | $ | 280,602 | $ | (3,673,370 | ) | $ | 4,306,777 | |||||||||
Liabilities & Equity |
||||||||||||||||||||
Accounts payable |
$ | 16,853 | $ | 156,994 | $ | 13,351 | $ | (18,085 | ) | $ | 169,113 | |||||||||
Accrued compensation and retirement costs |
11,557 | 51,588 | 3,867 | — | 67,012 | |||||||||||||||
Other current liabilities |
49,109 | 41,195 | 4,094 | — | 94,398 | |||||||||||||||
Current maturities of long-term debt |
78,250 | — | 8,133 | — | 86,383 | |||||||||||||||
Current maturities of capital lease obligations |
— | 634 | 29 | — | 663 | |||||||||||||||
Total current liabilities |
155,769 | 250,411 | 29,474 | (18,085 | ) | 417,569 | ||||||||||||||
Long-term debt |
849,220 | 155 | — | — | 849,375 | |||||||||||||||
Intercompany borrowings |
— | 1,832,229 | 25,214 | (1,857,443 | ) | — | ||||||||||||||
Deferred taxes and other long-term liabilities |
166,181 | 263,050 | 2,480 | — | 431,711 | |||||||||||||||
Total Reliance shareholders’ equity |
2,606,432 | 1,575,184 | 222,658 | (1,797,842 | ) | 2,606,432 | ||||||||||||||
Noncontrolling interests |
— | 914 | 776 | — | 1,690 | |||||||||||||||
Total equity |
2,606,432 | 1,576,098 | 223,434 | (1,797,842 | ) | 2,608,122 | ||||||||||||||
Total liabilities and equity |
$ | 3,777,602 | $ | 3,921,943 | $ | 280,602 | $ | (3,673,370 | ) | $ | 4,306,777 | |||||||||
73
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Balance Sheet
As of December 31, 2008
(in thousands)
As of December 31, 2008
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | Eliminations & | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Reclassifications | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 21,263 | $ | 19,201 | $ | 11,531 | $ | — | $ | 51,995 | ||||||||||
Accounts receivable, less allowance for
doubtful accounts |
73,871 | 731,696 | 45,647 | — | 851,214 | |||||||||||||||
Inventories |
43,553 | 1,175,595 | 65,320 | — | 1,284,468 | |||||||||||||||
Intercompany receivables |
469 | 21,772 | 366 | (22,607 | ) | — | ||||||||||||||
Prepaid expenses and other current assets |
80,397 | 31,047 | 3,251 | — | 114,695 | |||||||||||||||
Total current assets |
219,553 | 1,979,311 | 126,115 | (22,607 | ) | 2,302,372 | ||||||||||||||
Investments in subsidiaries |
2,104,631 | — | 459 | (2,105,090 | ) | — | ||||||||||||||
Property, plant and equipment, net |
90,005 | 876,539 | 32,162 | — | 998,706 | |||||||||||||||
Goodwill |
9,614 | 1,009,697 | 46,216 | — | 1,065,527 | |||||||||||||||
Intangible assets, net |
10,701 | 680,639 | 50,341 | — | 741,681 | |||||||||||||||
Intercompany receivables |
2,019,729 | — | — | (2,019,729 | ) | — | ||||||||||||||
Other assets |
3,572 | 82,810 | 817 | — | 87,199 | |||||||||||||||
Total assets |
$ | 4,457,805 | $ | 4,628,996 | $ | 256,110 | $ | (4,147,426 | ) | $ | 5,195,485 | |||||||||
Liabilities & Equity |
||||||||||||||||||||
Accounts payable |
$ | 26,758 | $ | 226,804 | $ | 17,357 | $ | (22,607 | ) | $ | 248,312 | |||||||||
Accrued compensation and retirement costs |
19,477 | 100,147 | 4,083 | — | 123,707 | |||||||||||||||
Other current liabilities |
45,093 | 134,294 | 4,244 | — | 183,631 | |||||||||||||||
Current maturities of long-term debt |
85,250 | 1,175 | 7,452 | — | 93,877 | |||||||||||||||
Current maturities of capital lease obligations |
— | 608 | 30 | — | 638 | |||||||||||||||
Total current liabilities |
176,578 | 463,028 | 33,166 | (22,607 | ) | 650,165 | ||||||||||||||
Long-term debt |
1,671,575 | 157 | — | — | 1,671,732 | |||||||||||||||
Intercompany borrowings |
— | 1,995,747 | 23,982 | (2,019,729 | ) | — | ||||||||||||||
Deferred taxes and other long-term liabilities |
178,216 | 257,878 | 2,426 | — | 438,520 | |||||||||||||||
Total Reliance shareholders’ equity |
2,431,436 | 1,910,269 | 194,821 | (2,105,090 | ) | 2,431,436 | ||||||||||||||
Noncontrolling interests |
— | 1,917 | 1,715 | — | 3,632 | |||||||||||||||
Total equity |
2,431,436 | 1,912,186 | 196,536 | (2,105,090 | ) | 2,435,068 | ||||||||||||||
Total liabilities and equity |
$ | 4,457,805 | $ | 4,628,996 | $ | 256,110 | $ | (4,147,426 | ) | $ | 5,195,485 | |||||||||
74
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Statement of Income
For the year ended December 31, 2009
(in thousands)
For the year ended December 31, 2009
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 499,966 | $ | 4,736,573 | $ | 213,311 | $ | (131,718 | ) | $ | 5,318,132 | |||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales (exclusive of depreciation
and amortization shown below) |
343,411 | 3,544,292 | 162,708 | (131,800 | ) | 3,918,611 | ||||||||||||||
Warehouse, delivery, selling, general and
administrative |
86,786 | 950,118 | 53,537 | (60,196 | ) | 1,030,245 | ||||||||||||||
Depreciation and amortization |
12,974 | 101,347 | 4,563 | — | 118,884 | |||||||||||||||
| 443,171 | 4,595,757 | 220,808 | (191,996 | ) | 5,067,740 | |||||||||||||||
Operating income (loss) |
56,795 | 140,816 | (7,497 | ) | 60,278 | 250,392 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest |
(68,499 | ) | (39,273 | ) | (544 | ) | 40,793 | (67,523 | ) | |||||||||||
Other income, net |
101,642 | 7,555 | 4,498 | (101,071 | ) | 12,624 | ||||||||||||||
Income (loss) before equity in earnings
(losses) of subsidiaries and income taxes |
89,938 | 109,098 | (3,543 | ) | — | 195,493 | ||||||||||||||
Equity in earnings (losses) of subsidiaries |
36,352 | (4,143 | ) | — | (32,209 | ) | — | |||||||||||||
Income (loss) before income taxes |
126,290 | 104,955 | (3,543 | ) | (32,209 | ) | 195,493 | |||||||||||||
Income tax (benefit) provision |
(21,868 | ) | 68,513 | (328 | ) | — | 46,317 | |||||||||||||
Net income (loss) |
148,158 | 36,442 | (3,215 | ) | (32,209 | ) | 149,176 | |||||||||||||
Less: Net income (loss) attributable
to noncontrolling interests |
— | 1,054 | (36 | ) | — | 1,018 | ||||||||||||||
Net income
(loss) attributable to Reliance |
$ | 148,158 | $ | 35,388 | $ | (3,179 | ) | $ | (32,209 | ) | $ | 148,158 | ||||||||
75
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Statement of Income
For the year ended December 31, 2008
(in thousands)
For the year ended December 31, 2008
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 868,472 | $ | 7,537,750 | $ | 402,405 | $ | (89,783 | ) | $ | 8,718,844 | |||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales (exclusive of depreciation
and amortization shown below) |
645,619 | 5,712,679 | 288,316 | (89,866 | ) | 6,556,748 | ||||||||||||||
Warehouse, delivery, selling, general and
administrative |
(30,304 | ) | 1,231,815 | 74,656 | (64,966 | ) | 1,211,201 | |||||||||||||
Depreciation and amortization |
10,235 | 83,326 | 4,363 | — | 97,924 | |||||||||||||||
| 625,550 | 7,027,820 | 367,335 | (154,832 | ) | 7,865,873 | |||||||||||||||
Operating income |
242,922 | 509,930 | 35,070 | 65,049 | 852,971 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest |
(86,526 | ) | (27,243 | ) | (1,665 | ) | 32,859 | (82,575 | ) | |||||||||||
Other income (expense), net |
97,718 | 2,051 | (5,701 | ) | (97,908 | ) | (3,840 | ) | ||||||||||||
Income before equity in earnings of
subsidiaries and income taxes |
254,114 | 484,738 | 27,704 | — | 766,556 | |||||||||||||||
Equity in earnings of subsidiaries |
215,759 | 6,744 | — | (222,503 | ) | — | ||||||||||||||
Income before income taxes |
469,873 | 491,482 | 27,704 | (222,503 | ) | 766,556 | ||||||||||||||
Income tax (benefit) provision |
(12,904 | ) | 288,421 | 7,404 | — | 282,921 | ||||||||||||||
Net income |
482,777 | 203,061 | 20,300 | (222,503 | ) | 483,635 | ||||||||||||||
Less: Net income attributable to
noncontrolling interests |
— | 842 | 16 | — | 858 | |||||||||||||||
Net income attributable to Reliance |
$ | 482,777 | $ | 202,219 | $ | 20,284 | $ | (222,503 | ) | $ | 482,777 | |||||||||
76
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Statement of Income
For the year ended December 31, 2007
(in thousands)
For the year ended December 31, 2007
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 913,752 | $ | 6,020,779 | $ | 380,062 | $ | (58,914 | ) | $ | 7,255,679 | |||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of sales (exclusive of depreciation
and amortization shown below) |
679,287 | 4,514,290 | 283,580 | (58,996 | ) | 5,418,161 | ||||||||||||||
Warehouse, delivery, selling, general and
administrative |
48,891 | 1,033,215 | 66,544 | (114,511 | ) | 1,034,139 | ||||||||||||||
Depreciation and amortization |
10,234 | 65,475 | 4,164 | — | 79,873 | |||||||||||||||
| 738,412 | 5,612,980 | 354,288 | (173,507 | ) | 6,532,173 | |||||||||||||||
Operating income |
175,340 | 407,799 | 25,774 | 114,593 | 723,506 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest |
(84,060 | ) | (19,432 | ) | (3,237 | ) | 28,019 | (78,710 | ) | |||||||||||
Other income, net |
142,658 | 605 | 9,280 | (142,612 | ) | 9,931 | ||||||||||||||
Income before equity in earnings of
subsidiaries and income taxes |
233,938 | 388,972 | 31,817 | — | 654,727 | |||||||||||||||
Equity in earnings of subsidiaries |
173,271 | 5,332 | — | (178,603 | ) | — | ||||||||||||||
Income before income taxes |
407,209 | 394,304 | 31,817 | (178,603 | ) | 654,727 | ||||||||||||||
Income tax (benefit) provision |
(746 | ) | 237,218 | 9,966 | — | 246,438 | ||||||||||||||
Net income |
407,955 | 157,086 | 21,851 | (178,603 | ) | 408,289 | ||||||||||||||
Less: Net income attributable to
noncontrolling interests |
— | — | 334 | — | 334 | |||||||||||||||
Net income attributable to Reliance |
$ | 407,955 | $ | 157,086 | $ | 21,517 | $ | (178,603 | ) | $ | 407,955 | |||||||||
77
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2009
(in thousands)
For the year ended December 31, 2009
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 148,158 | $ | 36,442 | $ | (3,215 | ) | $ | (32,209 | ) | $ | 149,176 | ||||||||
Equity in (earnings) losses of subsidiaries |
(36,352 | ) | 2,748 | — | 32,209 | (1,395 | ) | |||||||||||||
Adjustments to reconcile net income (loss)
to cash provided by operating activities |
(9,391 | ) | 772,732 | 31,874 | — | 795,215 | ||||||||||||||
Cash provided by operating activities |
102,415 | 811,922 | 28,659 | — | 942,996 | |||||||||||||||
Investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(10,283 | ) | (46,156 | ) | (13,462 | ) | — | (69,901 | ) | |||||||||||
Net advances from subsidiaries |
748,898 | — | — | (748,898 | ) | — | ||||||||||||||
Other investing activities, net |
82 | (24,010 | ) | 244 | — | (23,684 | ) | |||||||||||||
Cash provided by (used in) investing
activities |
738,697 | (70,166 | ) | (13,218 | ) | (748,898 | ) | (93,585 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net (repayments) borrowings of debt |
(829,464 | ) | (1,880 | ) | 176 | — | (831,168 | ) | ||||||||||||
Dividends paid |
(29,383 | ) | — | — | — | (29,383 | ) | |||||||||||||
Intercompany (repayments) borrowings |
— | (750,130 | ) | 1,232 | 748,898 | — | ||||||||||||||
Other financing activities, net |
5,440 | (2,057 | ) | (2,661 | ) | — | 722 | |||||||||||||
Cash used in financing activities |
(853,407 | ) | (754,067 | ) | (1,253 | ) | 748,898 | (859,829 | ) | |||||||||||
Effect of exchange rate changes on cash
and cash equivalents |
— | — | 1,425 | — | 1,425 | |||||||||||||||
(Decrease) increase in cash and cash
equivalents |
(12,295 | ) | (12,311 | ) | 15,613 | — | (8,993 | ) | ||||||||||||
Cash and cash equivalents at beginning of
period |
21,263 | 19,201 | 11,531 | — | 51,995 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 8,968 | $ | 6,890 | $ | 27,144 | $ | — | $ | 43,002 | ||||||||||
78
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2008
(in thousands)
For the year ended December 31, 2008
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net income |
$ | 482,777 | $ | 203,061 | $ | 20,300 | $ | (222,503 | ) | $ | 483,635 | |||||||||
Equity in earnings of subsidiaries |
(215,759 | ) | (7,309 | ) | — | 222,503 | (565 | ) | ||||||||||||
Adjustments to reconcile net income to cash
provided by operating activities |
73,943 | 100,485 | 7,186 | — | 181,614 | |||||||||||||||
Cash provided by operating activities |
340,961 | 296,237 | 27,486 | — | 664,684 | |||||||||||||||
Investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(14,911 | ) | (129,703 | ) | (7,276 | ) | — | (151,890 | ) | |||||||||||
Acquisitions of metals service centers and
net asset purchases of metals service
centers, net of cash acquired |
(316,999 | ) | (13,250 | ) | — | — | (330,249 | ) | ||||||||||||
Net advances from subsidiaries |
205,413 | — | — | (205,413 | ) | — | ||||||||||||||
Other investing activities, net |
1,082 | 16,127 | 7,276 | — | 24,485 | |||||||||||||||
Cash used in investing activities |
(125,415 | ) | (126,826 | ) | — | (205,413 | ) | (457,654 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net (repayments) borrowings of debt |
(109,075 | ) | (2,386 | ) | 550 | — | (110,911 | ) | ||||||||||||
Dividends paid |
(29,229 | ) | — | — | — | (29,229 | ) | |||||||||||||
Intercompany repayments |
— | (171,351 | ) | (34,062 | ) | 205,413 | — | |||||||||||||
Common stock repurchases |
(114,774 | ) | — | — | — | (114,774 | ) | |||||||||||||
Other financing activities, net |
23,426 | — | — | — | 23,426 | |||||||||||||||
Cash used in financing activities |
(229,652 | ) | (173,737 | ) | (33,512 | ) | 205,413 | (231,488 | ) | |||||||||||
Effect of exchange rate changes on cash
and cash equivalents |
— | — | (570 | ) | — | (570 | ) | |||||||||||||
Decrease in cash and cash equivalents |
(14,106 | ) | (4,326 | ) | (6,596 | ) | — | (25,028 | ) | |||||||||||
Cash and cash equivalents at beginning of
period |
35,369 | 23,527 | 18,127 | — | 77,023 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 21,263 | $ | 19,201 | $ | 11,531 | $ | — | $ | 51,995 | ||||||||||
79
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
December 31, 2009
Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2007
(in thousands)
For the year ended December 31, 2007
(in thousands)
| Non- | ||||||||||||||||||||
| Guarantor | Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net income |
$ | 407,955 | $ | 157,086 | $ | 21,851 | $ | (178,603 | ) | $ | 408,289 | |||||||||
Equity in earnings of subsidiaries |
(173,271 | ) | (5,332 | ) | — | 178,603 | — | |||||||||||||
Adjustments to reconcile net income to cash
provided by operating activities |
37,085 | 197,736 | (4,146 | ) | — | 230,675 | ||||||||||||||
Cash provided by operating activities |
271,769 | 349,490 | 17,705 | — | 638,964 | |||||||||||||||
Investing activities: |
||||||||||||||||||||
Purchases of property, plant and equipment |
(8,809 | ) | (111,930 | ) | (3,388 | ) | — | (124,127 | ) | |||||||||||
Acquisitions of metals service centers and
net asset purchases of metals service
centers, net of cash acquired |
(236,482 | ) | (33,475 | ) | — | — | (269,957 | ) | ||||||||||||
Net advances from subsidiaries |
118,423 | — | — | (118,423 | ) | — | ||||||||||||||
Other investing activities, net |
(492 | ) | (25,315 | ) | 83 | — | (25,724 | ) | ||||||||||||
Cash used in investing activities |
(127,360 | ) | (170,720 | ) | (3,305 | ) | (118,423 | ) | (419,808 | ) | ||||||||||
Financing activities: |
||||||||||||||||||||
Net repayments of debt |
(39,183 | ) | (36,682 | ) | (43,885 | ) | — | (119,750 | ) | |||||||||||
Dividends paid |
(24,207 | ) | — | — | — | (24,207 | ) | |||||||||||||
Intercompany (repayments) borrowings |
— | (156,063 | ) | 37,640 | 118,423 | — | ||||||||||||||
Common stock repurchases |
(82,168 | ) | — | — | — | (82,168 | ) | |||||||||||||
Other financing activities, net |
26,275 | — | — | — | 26,275 | |||||||||||||||
Cash used in financing activities |
(119,283 | ) | (192,745 | ) | (6,245 | ) | 118,423 | (199,850 | ) | |||||||||||
Effect of exchange rate changes on cash
and cash equivalents |
— | — | 242 | — | 242 | |||||||||||||||
Increase (decrease) in cash and cash
equivalents |
25,126 | (13,975 | ) | 8,397 | — | 19,548 | ||||||||||||||
Cash and cash equivalents at beginning of
period |
10,243 | 37,502 | 9,730 | — | 57,475 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 35,369 | $ | 23,527 | $ | 18,127 | $ | — | $ | 77,023 | ||||||||||
80
RELIANCE STEEL & ALUMINUM CO.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended
December 31, 2009 and 2008:
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
2009: |
||||||||||||||||
Net sales |
$ | 1,558,535 | $ | 1,242,978 | $ | 1,243,373 | $ | 1,273,246 | ||||||||
Cost of sales |
$ | 1,204,093 | $ | 960,093 | $ | 886,904 | $ | 867,521 | ||||||||
Gross profit (1) |
$ | 354,442 | $ | 282,885 | $ | 356,469 | $ | 405,725 | ||||||||
Net income (loss) |
$ | 20,388 | $ | (5,556 | ) | $ | 42,077 | $ | 92,267 | |||||||
Net income (loss) attributable to Reliance |
$ | 20,118 | $ | (5,787 | ) | $ | 41,757 | $ | 92,070 | |||||||
Diluted earnings (loss) per common share
attributable to Reliance shareholders |
$ | 0.27 | $ | (0.08 | ) | $ | 0.57 | $ | 1.25 | |||||||
Basic earnings (loss) per common share
attributable to Reliance shareholders |
$ | 0.27 | $ | (0.08 | ) | $ | 0.57 | $ | 1.25 | |||||||
2008: |
||||||||||||||||
Net sales |
$ | 1,908,170 | $ | 2,095,068 | $ | 2,572,836 | $ | 2,142,770 | ||||||||
Cost of sales |
$ | 1,415,891 | $ | 1,508,134 | $ | 1,948,788 | $ | 1,683,935 | ||||||||
Gross profit (1) |
$ | 492,279 | $ | 586,934 | $ | 624,048 | $ | 458,835 | ||||||||
Net income |
$ | 107,458 | $ | 156,605 | $ | 153,122 | $ | 66,450 | ||||||||
Net income attributable to Reliance |
$ | 107,395 | $ | 156,596 | $ | 152,498 | $ | 66,288 | ||||||||
Diluted earnings per common share
attributable to Reliance shareholders |
$ | 1.46 | $ | 2.12 | $ | 2.07 | $ | 0.90 | ||||||||
Basic earnings per common share
attributable to Reliance shareholders |
$ | 1.47 | $ | 2.14 | $ | 2.08 | $ | 0.90 | ||||||||
| (1) | Gross profit, calculated as Net sales less Cost of sales, is a non-GAAP financial measure as it excludes depreciation and amortization expense associated with the corresponding sales. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first-stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, are not significant and are excluded from our Cost of sales. Therefore, our Cost of sales is primarily comprised of the cost of the material we sell. The Company uses Gross profit as shown above as a measure of operating performance. Gross profit is an important operating and financial measure, as fluctuations in Gross profit and Gross profit margin can have a significant impact on our earnings. Gross profit, as presented, is not necessarily comparable with similarly titled measures for other companies. |
Quarterly and year-to-date computations of per share amounts are made independently.
Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for
the year shown elsewhere in the Annual Report on Form 10-K.
81
RELIANCE STEEL & ALUMINUM CO.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
(In thousands)
| Additions | ||||||||||||||||||||
| Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
| Beginning | Costs and | Other | End of | |||||||||||||||||
| Description | of Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
Year Ended December 31, 2007
Allowance for doubtful
accounts |
$ | 16,755 | $ | 3,918 | $ | 1,338 | (1) | $ | 5,858 | (2) | $ | 16,153 | ||||||||
Year Ended December 31, 2008
Allowance for doubtful
accounts |
$ | 16,153 | $ | 6,065 | $ | 7,875 | (1) | $ | 8,075 | (2) | $ | 22,018 | ||||||||
Year Ended December 31, 2009
Allowance for doubtful
accounts |
$ | 22,018 | $ | 18,775 | $ | 123 | $ | 19,647 | (2) | $ | 21,269 | |||||||||
| (1) | Additions from acquisitions charged to goodwill. | |
| (2) | Uncollectible accounts written off, net of recoveries. |
See accompanying reports of independent registered public accounting firms.
82
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
There have been no changes in or disagreements with the Company’s accountants on any
accounting or financial disclosure issues, except that, as previously reported, our Audit Committee
determined to replace Ernst & Young LLP with KPMG LLP as the Company’s independent registered
public accountant beginning with the year ending December 31, 2008.
| Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information
required to be disclosed in the reports we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within time periods specified in
the Securities and Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer, or CEO, and chief
financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of the Company’s management, including our
CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this annual report. Based
on that evaluation, our management, including our CEO and CFO, concluded that our disclosure
controls and procedures were effective as of December 31, 2009 at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
An evaluation was also performed under the supervision and with the participation of our
management, including our CEO and CFO, of any change in our internal controls over financial
reporting that occurred during our last fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial reporting. That
evaluation did not identify any change in our internal controls over financial reporting that
occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our CEO and CFO,
we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework
in Internal Control – Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has
been audited by KPMG LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
| Item 9B. | Other Information. |
None.
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Reliance Steel & Aluminum Co.:
Reliance Steel & Aluminum Co.:
We have audited Reliance Steel & Aluminum Co.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Reliance Steel &
Aluminum Co.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Reliance Steel & Aluminum Co. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Reliance Steel & Aluminum Co. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income,
equity, and cash flows for the years then ended, and our report dated February 26, 2010 expressed
an unqualified opinion on those consolidated financial statements and the 2009 and 2008 information
in the financial statement schedule.
/s/ KPMG LLP
Los Angeles, California
February 26, 2010
February 26, 2010
84
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The narrative and tabular information included under the caption “Management” and under the
caption “Compliance with Section 16(a)” of the Proxy Statement for the annual meeting of
shareholders to be held on May 19, 2010 are incorporated herein by reference.
| Item 11. | Executive Compensation. |
The narrative and tabular information, including footnotes thereto, included in the caption
“Executive Compensation” of the Proxy Statement are incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The narrative and tabular information, including footnotes thereto, included under the caption
“Securities Ownership of Certain Beneficial Owners and Management” of the Proxy Statement are
incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions and Director Independence. |
The narrative information included under the caption “Certain Transactions” of the Proxy
Statement is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The narrative information included under the caption “Independent Registered Public Accounting
Firm” of the Proxy Statement is incorporated herein by reference.
85
PART IV
| Item 15. | Exhibits, Financial Statement Schedules. |
| (a) | The following documents are filed as part of this report: |
| (1) | Financial Statements (included in Item 8). |
| Reports of Independent Registered Public Accounting Firms | |||
| Consolidated Balance Sheets as of December 31, 2009 and 2008 | |||
| Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007 | |||
| Consolidated Statements of Equity for the Years Ended December 31, 2009, 2008 and 2007 | |||
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 | |||
| Notes to the Consolidated Financial Statements | |||
| Quarterly Results of Operations (Unaudited) for the Years Ended December 31, 2009 and 2008 |
| (2) | Financial Statement Schedules |
| Schedule II – Valuation and Qualifying Accounts |
All other schedules have been omitted since the required information is not significant or
is included in the Consolidated Financial Statements or notes thereto or is not applicable.
| (3) | Exhibits |
| Exhibit | ||
| Number | Description | |
2.01
|
Agreement and Plan of Merger dated as of January 17, 2006, among Reliance Steel & Aluminum Co., RSAC Acquisition Corp. and Earle M. Jorgensen Company(1) | |
3.01
|
Registrant’s Restated Articles of Incorporation(2) | |
3.02
|
Registrant’s Amended and Restated Bylaws(3) | |
3.03
|
Amendment to Registrant’s Restated Articles of Incorporation dated May 20, 1998(4) | |
4.01
|
Indenture dated November 20, 2006 by and among Reliance, the Subsidiary Guarantors named therein and Wells Fargo Bank, a National Association and Forms of the Notes and the Exchange Notes under the Indenture(5) | |
4.02
|
Earle M. Jorgensen Company 2004 Stock Incentive Plan(11) | |
4.03
|
Amended and Restated Credit Agreement dated November 9, 2006 by and among Registrant and RSAC Management Corp., collectively as Borrowers, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (12) | |
4.04
|
First Amendment to Amended and Restated Credit Agreement dated as of July 31, 2008 by and among Registrant and RSAC Management Corp., collectively as Borrowers, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (14) | |
4.05
|
Second Amendment to Amended and Restated Credit Agreement dated as of September 25, 2009 by and among Registrant, as Borrower, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (17) | |
4.06
|
Fourth Supplemental Indenture, dated August 1, 2008 by and among The Bank of New York Mellon, as Trustee, and PNA Group, Inc. and the subsidiaries of PNA Group, Inc. that are guarantors with respect thereto. (14) | |
10.01
|
Registrant’s Form of Indemnification Agreement for officers and directors(2) | |
10.02
|
Registrant’s Supplemental Executive Retirement Plan dated January 1, 1996(4) | |
10.03
|
Registrant’s Amended and Restated Directors Stock Option Plan (6) | |
10.04
|
Registrant’s Amended and Restated Stock Option and Restricted Stock Plan and the Forms of agreements related thereto (7) | |
10.05
|
Omnibus Amendment to Note Purchase Agreements(8) | |
10.06
|
Form of Note Purchase Agreement dated as of July 1, 2003 by and between the Registrant and each of the Purchasers listed on the Schedule thereto(9) |
86
| Exhibit | ||
| Number | Description | |
10.07
|
Omnibus Amendment No. 2 to Note Purchase Agreements(10) | |
10.08
|
Corporate Officers Bonus Plan effective January 1, 2008(15) | |
10.09
|
Registrant’s Deferred Compensation Plan effective December 1, 2008(16) | |
10.10
|
Registrant’s Supplemental Executive Retirement Plan (Amended and Restated effective as of January 1, 2009) (16) | |
14.01
|
Registrant’s Code of Conduct(13) | |
21
|
Subsidiaries of Registrant | |
23.1
|
Consent of Independent Registered Public Accounting Firm KPMG LLP | |
23.2
|
Consent of Independent Registered Public Accounting Firm Ernst & Young LLP | |
24
|
Power of Attorney(18) | |
31.01
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |
31.02
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Incorporated by reference from Exhibit 2.1 to Registrant’s Current Report on Form 8-K, originally filed on January 19, 2006. | |
| (2) | Incorporated by reference from Exhibits 3.01 and 10.03, respectively, to Registrant’s Registration Statement on Form S-1, as amended, originally filed on May 25, 1994 as Commission File No. 33-79318. | |
| (3) | Incorporated by reference from Exhibit 3.01 to Registrant’s Current Report on Form 8-K dated October 14, 2009. | |
| (4) | Incorporated by reference from Exhibit 10.06 to Registrant’s Annual Report on Form 10-K, for the year ended December 31, 1996. | |
| (5) | Incorporated by reference from Exhibits 10.1 and 10.2 to Registrant’s Current Report on Form 8-K dated November 20, 2006. | |
| (6) | Incorporated by reference from Appendix A to Registrant’s Proxy Statement for Annual Meeting of Shareholders held May 18, 2005. | |
| (7) | Incorporated by reference from Exhibits 4.1, 4.2 and 4.3 to Registrant’s Registration Statement on Form S-8 filed on August 4, 2006 as Commission File No. 333-136290. | |
| (8) | Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated June 13, 2005. | |
| (9) | Incorporated by reference from Exhibit 2.2 to Registrant’s Current Report on Form 8-K dated July 1, 2003. | |
| (10) | Incorporated by reference from Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated April 3, 2006. | |
| (11) | Incorporated by reference from Exhibits 4.1 through 4.7 to Registrant’s Registration Statement on Form S-8, filed on April 11, 2006 as Commission File No. 333-133204. | |
| (12) | Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated November 9, 2006. | |
| (13) | Incorporated by reference from Exhibit 14.01 to Registrant’s Annual Report on Form 10-K filed March 15, 2005. | |
| (14) | Incorporated by reference from Exhibits 4.2 and 4.3, respectively, to Registrant’s Current Report on Form 8-K, filed on August 7, 2008. | |
| (15) | Incorporated by reference from Appendix A to Registrant’s Proxy Statement for Annual Meeting of Shareholders held May 21, 2008 | |
| (16) | Incorporated by reference from Exhibits 10.14 and 10.15, respectively, to Registrant’s Form Annual Report on 10-K, for the year ended December 31, 2008. | |
| (17) | Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 28, 2009. | |
| (18) | Set forth on page 88 of this report. |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on
this 26th day of February 2010.
| RELIANCE STEEL & ALUMINUM CO. |
||||
| By: | /s/ David H. Hannah | |||
| David H. Hannah | ||||
| Chairman and Chief Executive Officer | ||||
POWER OF ATTORNEY
The officers and directors of Reliance Steel & Aluminum Co. whose signatures appear below
hereby constitute and appoint David H. Hannah and Gregg J. Mollins, or either of them, to act
severally as attorneys-in-fact and agents, with power of substitution and resubstitution, for each
of them in any and all capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons in the capacities and on the dates indicated.
| Signatures | Title | Date | ||
/s/ DAVID H. HANNAH
David H. Hannah
|
Chief Executive Officer (Principal Executive Officer); Chairman of the Board; Director | February 26, 2010 | ||
/s/ GREGG J. MOLLINS
Gregg J. Mollins
|
President and Chief Operating Officer; Director | February 26, 2010 | ||
/s/ KARLA R. LEWIS
Karla R. Lewis
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer; Principal Accounting Officer) | February 26, 2010 | ||
/s/ THOMAS W. GIMBEL
Thomas W. Gimbel
|
Director | February 26, 2010 | ||
/s/ DOUGLAS M. HAYES
Douglas M. Hayes
|
Director | February 26, 2010 | ||
/s/ MARK V. KAMINSKI
Mark V. Kaminski
|
Director | February 26, 2010 | ||
/s/ FRANKLIN R. JOHNSON
Franklin R. Johnson
|
Director | February 26, 2010 | ||
/s/ ANDREW G. SHARKEY III
Andrew G. Sharkey III
|
Director | February 26, 2010 | ||
/s/ LESLIE A. WAITE
Leslie A. Waite
|
Director | February 26, 2010 |
88
EXHIBIT INDEX
| Sequentially | ||||||
| Exhibit | Numbered | |||||
| Number | Description | Page | ||||
2.01
|
Agreement and Plan of Merger dated as of January 17, 2006, among Reliance Steel & Aluminum Co., RSAC Acquisition Corp. and Earle M. Jorgensen Company(1) | |||||
3.01
|
Registrant’s Restated Articles of Incorporation(2) | |||||
3.02
|
Registrant’s Amended and Restated Bylaws(3) | |||||
3.03
|
Amendment to Registrant’s Restated Articles of Incorporation dated May 20, 1998(4) | |||||
4.01
|
Indenture dated November 20, 2006 by and among Reliance, the Subsidiary Guarantors named therein and Wells Fargo Bank, a National Association and Forms of the Notes and the Exchange Notes under the Indenture(5) | |||||
4.02
|
Earle M. Jorgensen Company 2004 Stock Incentive Plan(11) | |||||
4.03
|
Amended and Restated Credit Agreement dated November 9, 2006 by and among Registrant and RSAC Management Corp., collectively as Borrowers, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (12) | |||||
4.04
|
First Amendment to Amended and Restated Credit Agreement dated as of July 31, 2008 by and among Registrant and RSAC Management Corp., collectively as Borrowers, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (14) | |||||
4.05
|
Second Amendment to Amended and Restated Credit Agreement dated as of September 25, 2009 by and among Registrant, as Borrower, and Bank of America, N.A., as Administrative Agent, and the banks identified as lenders therein. (17) | |||||
4.06
|
Fourth Supplemental Indenture, dated August 1, 2008 by and among The Bank of New York Mellon, as Trustee, and PNA Group, Inc. and the subsidiaries of PNA Group, Inc. that are guarantors with respect thereto. (14) | |||||
10.01
|
Registrant’s Form of Indemnification Agreement for officers and directors(2) | |||||
10.02
|
Registrant’s Supplemental Executive Retirement Plan dated January 1, 1996(4) | |||||
10.03
|
Registrant’s Amended and Restated Directors Stock Option Plan (6) | |||||
10.04
|
Registrant’s Amended and Restated Stock Option and Restricted Stock Plan and the Forms of agreements related thereto (7) | |||||
10.05
|
Omnibus Amendment to Note Purchase Agreements(8) | |||||
10.06
|
Form of Note Purchase Agreement dated as of July 1, 2003 by and between the Registrant and each of the Purchasers listed on the Schedule thereto(9) | |||||
10.07
|
Omnibus Amendment No. 2 to Note Purchase Agreements(10) | |||||
10.08
|
Corporate Officers Bonus Plan effective January 1, 2008(15) | |||||
10.09
|
Registrant’s Deferred Compensation Plan effective December 1, 2008(16) | |||||
10.10
|
Registrant’s Supplemental Executive Retirement Plan (Amended and Restated effective as of January 1, 2009) (16) | |||||
14.01
|
Registrant’s Code of Conduct(13) | |||||
21
|
Subsidiaries of Registrant | |||||
23.1
|
Consent of Independent Registered Public Accounting Firm KPMG LLP | |||||
23.2
|
Consent of Independent Registered Public Accounting Firm Ernst & Young LLP | |||||
24
|
Power of Attorney(18) | |||||
31.01
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |||||
31.02
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |||||
32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
89
| (1) | Incorporated by reference from Exhibit 2.1 to Registrant’s Current Report on Form 8-K, originally filed on January 19, 2006. | |
| (2) | Incorporated by reference from Exhibits 3.01 and 10.03, respectively, to Registrant’s Registration Statement on Form S-1, as amended, originally filed on May 25, 1994 as Commission File No. 33-79318. | |
| (3) | Incorporated by reference from Exhibit 3.01 to Registrant’s Current Report on Form 8-K dated October 14, 2009. | |
| (4) | Incorporated by reference from Exhibit 10.06 to Registrant’s Form Annual Report on 10-K, for the year ended December 31, 1996. | |
| (5) | Incorporated by reference from Exhibits 10.1 and 10.2 to Registrant’s Current Report on Form 8-K dated November 20, 2006. | |
| (6) | Incorporated by reference from Appendix A to Registrant’s Proxy Statement for Annual Meeting of Shareholders held May 18, 2005. | |
| (7) | Incorporated by reference from Exhibits 4.1, 4.2 and 4.3 to Registrant’s Registration Statement on Form S-8 filed on August 4, 2006 as Commission File No. 333-136290. | |
| (8) | Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated June 13, 2005. | |
| (9) | Incorporated by reference from Exhibit 2.2 to Registrant’s Current Report on Form 8-K dated July 1, 2003. | |
| (10) | Incorporated by reference from Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated April 3, 2006. | |
| (11) | Incorporated by reference from Exhibits 4.1 through 4.7 to Registrant’s Registration Statement on Form S-8, filed on April 11, 2006 as Commission File No. 333-133204. | |
| (12) | Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated November 9, 2006. | |
| (13) | Incorporated by reference from Exhibit 14.01 to Registrant’s Annual Report on Form 10-K filed March 15, 2005. | |
| (14) | Incorporated by reference from Exhibits 4.2 and 4.3, respectively, to Registrant’s Current Report on Form 8-K, filed on August 7, 2008. | |
| (15) | Incorporated by reference from Appendix A to Registrant’s Proxy Statement for Annual Meeting of Shareholders held May 21, 2008 | |
| (16) | Incorporated by reference from Exhibits 10.14 and 10.15, respectively, to Registrant’s Form Annual Report on 10-K, for the year ended December 31, 2008. | |
| (17) | Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 28, 2009. | |
| (18) | Set forth on page 88 of this report. |
90