RELIANCE STEEL & ALUMINUM CO - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

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)

 

 

350 South Grand Avenue, Suite 5100

Los Angeles, California 90071

(213) 687-7700

(Address of principal executive offices and telephone number)

 

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  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  þ  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No  þ

 

As of July 28, 2014, 77,967,476 shares of the registrant’s common stock, no par value, were outstanding.

 

 

Table of Contents

 

RELIANCE STEEL & ALUMINUM CO.

TABLE OF CONTENTS

 

PART I -- FINANCIAL INFORMATION		1
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets at June 30, 2014 and December 31, 2013	1
	Unaudited Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2014 and 2013	2
	Unaudited Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2014 and 2013	3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II -- OTHER INFORMATION		30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits	31
SIGNATURES		32
EXHIBIT INDEX		33

 

Table of Contents

 

PART I -- FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

 

ASSETS

 

		June 30,			December 31,
		2014			2013*
Current assets:
Cash and cash equivalents		$	113.5		$	83.6
Accounts receivable, less allowance for doubtful accounts of $20.6 at June 30, 2014 and $18.9 at December 31, 2013		1,169.2			983.5
Inventories		1,769.9			1,540.0
Prepaid expenses and other current assets		63.9			59.0
Income taxes receivable		—			33.9
Deferred income taxes		38.9			38.9
Total current assets		3,155.4			2,738.9
Property, plant and equipment:
Land		192.5			191.7
Buildings		951.7			934.6
Machinery and equipment		1,406.3			1,350.3
Accumulated depreciation		(942.7		)	(872.7		)
		1,607.8			1,603.9
Goodwill		1,676.3			1,691.6
Intangible assets, net		1,186.2			1,213.8
Cash surrender value of life insurance policies, net		40.5			45.4
Investments in unconsolidated entities		15.1			14.1
Other assets		33.4			33.3
Total assets		$	7,714.7		$	7,341.0
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	457.8		$	280.3
Accrued expenses		108.1			91.1
Accrued compensation and retirement costs		105.0			119.5
Accrued insurance costs		45.7			46.0
Current maturities of long-term debt and short-term borrowings		39.2			36.5
Income taxes payable		6.7			—
Total current liabilities		762.5			573.4
Long-term debt		2,093.2			2,072.5
Long-term retirement costs		84.7			84.0
Other long-term liabilities		30.7			35.9
Deferred income taxes		689.4			690.8
Commitments and contingencies
Equity:
Preferred stock, no par value:
Authorized shares — 5,000,000
None issued or outstanding		—			—
Common stock, no par value:
Authorized shares — 200,000,000
Issued and outstanding shares – 77,941,158 at June 30, 2014 and 77,492,017 at December 31, 2013, stated capital		852.5			818.3
Retained earnings		3,193.1			3,063.0
Accumulated other comprehensive loss		(1.3		)	(6.7		)
Total Reliance shareholders’ equity		4,044.3			3,874.6
Noncontrolling interests		9.9			9.8
Total equity		4,054.2			3,884.4
Total liabilities and equity		$	7,714.7		$	7,341.0

 

* Amounts were derived from audited financial statements.

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts)

 

		Three Months						Six Months
		Ended June 30,						Ended June 30,
		2014			2013			2014			2013
Net sales		$	2,616.8		$	2,448.3		$	5,169.8		$	4,473.6
Costs and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		1,943.5			1,826.7			3,849.3			3,323.2
Warehouse, delivery, selling, general and administrative		444.9			426.0			885.9			783.7
Depreciation and amortization		52.7			50.1			104.6			91.2
		2,441.1			2,302.8			4,839.8			4,198.1
Operating income		175.7			145.5			330.0			275.5
Other income (expense):
Interest		(20.2		)	(22.1		)	(40.4		)	(35.2		)
Other (expense) income, net		(1.3		)	(0.6		)	(1.3		)	2.3
Income before income taxes		154.2			122.8			288.3			242.6
Income tax provision		56.4			40.9			102.6			76.2
Net income		97.8			81.9			185.7			166.4
Less: Net income attributable to noncontrolling interests		1.3			0.9			2.0			1.7
Net income attributable to Reliance		$	96.5		$	81.0		$	183.7		$	164.7
Earnings per share:
Diluted earnings per common share attributable to Reliance shareholders		$	1.22		$	1.05		$	2.34		$	2.13
Basic earnings per common share attributable to Reliance shareholders		$	1.24		$	1.06		$	2.37		$	2.15
Cash dividends per share		$	0.35		$	0.30		$	0.70		$	0.60

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2014			2013			2014			2013
Net income		$	97.8		$	81.9		$	185.7		$	166.4
Other comprehensive income (loss):
Foreign currency translation gain (loss)		14.2			(9.8		)	5.3			(19.9		)
Unrealized gain on investments, net of tax		—			—			0.1			0.2
Total other comprehensive income (loss)		14.2			(9.8		)	5.4			(19.7		)
Comprehensive income		112.0			72.1			191.1			146.7
Less: comprehensive income attributable to noncontrolling interests		1.3			0.9			2.0			1.7
Comprehensive income attributable to Reliance		$	110.7		$	71.2		$	189.1		$	145.0

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

		Six Months Ended
		June 30,
		2014			2013
Operating activities:
Net income		$	185.7		$	166.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		104.6			91.2
Deferred income tax (benefit) provision		(1.5		)	0.6
(Gain) loss on sales of property, plant and equipment		(1.0		)	1.0
Equity in earnings of unconsolidated entities		(1.4		)	(0.9		)
Dividends received from unconsolidated entity		0.4			0.4
Share-based compensation expense		12.9			14.5
Other		4.4			(0.5		)
Changes in operating assets and liabilities:
Accounts receivable		(188.0		)	(133.2		)
Inventories		(230.4		)	62.8
Prepaid expenses and other assets		37.2			11.3
Accounts payable and other liabilities		186.6			70.3
Net cash provided by operating activities		109.5			283.9
Investing activities:
Purchases of property, plant and equipment		(86.9		)	(74.3		)
Acquisitions, net of cash acquired		—			(794.7		)
Proceeds from sale of business, net		26.2			—
Other		(9.0		)	8.5
Net cash used in investing activities		(69.7		)	(860.5		)
Financing activities:
Net short-term debt repayments		(3.6		)	(469.3		)
Proceeds from long-term debt borrowings		297.0			2,257.9
Principal payments on long-term debt		(270.3		)	(1,191.6		)
Debt issuance costs		—			(10.3		)
Dividends paid		(54.4		)	(46.0		)
Exercise of stock options		21.3			42.4
Other		(1.1		)	(1.7		)
Net cash (used in) provided by financing activities		(11.1		)	581.4
Effect of exchange rate changes on cash		1.2			(1.6		)
Increase in cash and cash equivalents		29.9			3.2
Cash and cash equivalents at beginning of year		83.6			97.6
Cash and cash equivalents at end of period		$	113.5		$	100.8
Supplemental cash flow information:
Interest paid during the period		$	40.5		$	29.9
Income taxes paid during the period, net		$	62.5		$	65.7
Non-cash investing and financing activities:
Debt assumed in connection with acquisitions		$	—		$	529.9

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

1.  Basis of Presentation

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements, have been included. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results for the full year ending December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2013, included in Reliance Steel & Aluminum Co.’s (“Reliance”, the “Company”, “we”, “our” or “us”) Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

 

Our 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. Our investments in unconsolidated subsidiaries are recorded under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.

 

2.  Impact of Recently Issued Accounting Guidance

 

Impact of Recently Issued Accounting Standards—Adopted

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity—In April 2014, the FASB issued accounting guidance for reporting discontinued operations and disposals of components of an entity. The new guidance limits discontinued operations reporting to those disposals which represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The updated guidance also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. The new accounting guidance is effective for disposals that occur during fiscal years that begin after December 15, 2014. Early adoption of the new accounting guidance is permitted and we adopted the new guidance during the three months ended June 30, 2014 and applied it to our sale of Metals USA’s non-core roofing business in May 2014. The adoption of these changes did not have a material impact on our consolidated financial statements.

 

Impact of Recently Issued Accounting Standards—Not Yet Adopted

 

Revenue from Contracts with Customers—In May 2014, the FASB issued accounting changes which replace most of the detailed guidance on revenue recognition that currently exists under U.S. GAAP. Under the new guidance an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We are evaluating the new standard, but do not at this time expect this standard to have a material impact on our consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

3.  Acquisitions

 

2013 Acquisitions

 

On November 1, 2013, through our wholly-owned subsidiary American Metals Corporation, we acquired Haskins Steel Co., Inc. (“Haskins Steel”), located in Spokane, Washington. Founded in 1955, Haskins Steel processes and distributes primarily carbon steel and aluminum products of various shapes and sizes to a diverse customer base in the Pacific Northwest. Their in-house processing capabilities include shearing, sawing, burning and forming. Net sales of Haskins Steel for the six months ended June 30, 2014 were $15.9 million.

 

On April 30, 2013, we acquired Travel Main Holdings, LLC (“Travel Main”), a real estate holding company with a portfolio of 18 real estate properties, all of which are leased by certain of our subsidiaries. The transaction value of $78.9 million included the assumption of $43.8 million of indebtedness.  The cash portion of the purchase price was funded with borrowings on our revolving credit facility.

 

On April 12, 2013, we acquired Metals USA Holdings Corp. (“Metals USA”). Metals USA is one of the largest metals service center businesses in the United States and a leading provider of value-added processed aluminum, brass, copper, carbon steel, stainless steel, manufactured metal components and inventory management services. Metals USA sells its products and services to a diverse customer base and broad range of end markets, including the aerospace, auto, defense, heavy equipment, marine transportation, commercial construction, office furniture manufacturing, energy and oilfield service industries, among several others. This acquisition added a total of 44 service centers strategically located throughout the United States to our existing operations and complements our existing customer base, product mix and geographic footprint. Net sales of Metals USA for the six months ended June 30, 2014 were $918.6 million. Effective May 16, 2014, the Company sold Metals USA’s non-core roofing business for net proceeds of approximately $26.2 million and recorded a pre-tax loss of approximately $1.1 million, which is included in other expense, net.  Net sales of Metals USA’s non-core roofing business during the six months ended June 30, 2014 and during the period from April 13, 2013 through December 31, 2013 were $9.6 million and $25.4 million, respectively.

 

The purchase price for Metals USA of $766.8 million along with assumed debt of $486.1 million represented a total transaction value of approximately $1.25 billion. We funded the transaction and refinanced all but $12.3 million of Metals USA’s debt with proceeds from our $500.0 million term loan, which we entered into in April 2013, and our April 2013 $500.0 million senior notes offering, with the balance drawn on our revolving credit facility (see Note 7). During the three months and six months ended June 30, 2013 we incurred approximately $11.4 million in transaction related costs, which are included in warehouse, delivery, selling, general and administrative expenses.

 

The allocation of the total purchase price of Metals USA to the fair values of assets acquired and liabilities assumed was as follows:

 

		(in millions)
Cash		$	3.2
Accounts receivable		206.0
Inventories		379.5
Property, plant and equipment		242.6
Goodwill		382.7
Intangible assets subject to amortization		137.6
Intangible assets not subject to amortization		203.0
Other current and long-term assets		9.1
Total assets acquired		1,563.7
Current and long-term debt		486.1
Deferred taxes		184.4
Other current and long-term liabilities		126.4
Total liabilities assumed		796.9
Net assets acquired		$	766.8

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

Purchase price allocations

 

The acquisitions discussed in this note have been accounted for under the acquisition method of accounting and, accordingly, the respective purchase price has been allocated to the assets acquired and liabilities assumed based on their 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 allocation of each acquisition’s purchase price as of June 30, 2014, as applicable.  The purchase price allocation for the Haskins Steel acquisition is preliminary and is pending the completion of pre-acquisition period income tax returns. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date.

 

Pro forma financial information

 

The following pro forma summary financial results present the consolidated results of operations as if the acquisition of Metals USA had occurred as of January 1, 2013, after the effect of certain adjustments, including interest expense on the acquisition debt, non-recurring acquisition related costs, and amortization of certain identifiable intangible assets. The pro forma summary financial results reflect Metals USA’s historical method for inventory valuation, which was the first-in, first-out (FIFO) method for the majority of its inventories.  Metals USA adopted the last-in, first-out (LIFO) method of inventory valuation upon acquisition. The pro forma summary financial results for the three months and six months ended June 30, 2013 excluded approximately $43.5 million and $48.7 million of acquisition and related costs, respectively.

 

The pro forma results have been presented for comparative purposes only and are not indicative of what would have occurred had the Metals USA acquisition been made as of January 1, 2013, or of any potential results which may occur in the future.

 

		Three Months Ended			Six Months Ended
		June 30, 2013			June 30, 2013
		(in millions, except			(in millions, except
		per share amounts)			per share amounts)
Pro forma:
Net sales		$	2,519.2		$	5,003.6
Net income attributable to Reliance		$	83.0		$	172.0
Diluted earnings per common share attributable to Reliance shareholders		$	1.07		$	2.23
Basic earnings per common share attributable to Reliance shareholders		$	1.08		$	2.25

 

4.  Goodwill

 

The change in the carrying amount of goodwill is as follows:

 

		(in millions)
Balance at December 31, 2013		$	1,691.6
Purchase price allocation adjustment		1.2
Sale of business		(17.1		)
Effect of foreign currency translation		0.6
Balance at June 30, 2014		$	1,676.3

 

We had no accumulated impairment losses related to goodwill as of June 30, 2014.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

5.  Intangible Assets, net

 

Intangible assets, net consisted of the following:

 

					June 30, 2014						December 31, 2013
		Weighted Average			Gross						Gross
		Amortizable			Carrying			Accumulated			Carrying			Accumulated
		Life in Years			Amount			Amortization			Amount			Amortization
					(in millions)
Intangible assets subject to amortization:
Covenants not to compete		4.	5		$	2.1		$	(1.5	)	$	8.0		$	(7.3	)
Loan fees		3.	8		41.5			(25.7		)	41.5			(24.1		)
Customer lists/relationships		14.	6		654.8			(225.9		)	654.3			(200.6		)
Software – internal use		10.	0		8.1			(6.7		)	8.1			(6.3		)
Other		5.	2		7.2			(3.5		)	7.4			(2.7		)
					713.7			(263.3		)	719.3			(241.0		)
Intangible assets not subject to amortization:
Trade names					735.8			—			735.5			—
					$	1,449.5		$	(263.3	)	$	1,454.8		$	(241.0	)

 

We recognized amortization expense for intangible assets of $28.2 million and $26.4 million for the six months ended June 30, 2014 and 2013, respectively. Other changes in intangible assets, net during the six months ended June 30, 2014 are due to foreign currency translation gains of $0.6 million.

 

The following is a summary of estimated aggregate amortization expense for the remaining six months of 2014 and each of the succeeding five years:

 

 

6.  Income Taxes

 

Our effective income tax rates for the three-month periods ended June 30, 2014 and 2013 were 36.6% and 33.3%, respectively. Our effective income tax rates for the six-month periods ended June 30, 2014 and 2013 were 35.6% and 31.4%, respectively. Our 2014 three-month and six-month period effective income tax rates were unfavorably impacted by the sale of certain non-core assets acquired as part of the Metals USA acquisition. Permanent items that lowered our effective income tax rates from the federal statutory rate were not materially different in amounts during both years and relate mainly to company-owned life insurance policies, domestic production activities deductions and foreign income levels that are taxed at rates lower than the U.S. statutory rate of 35%.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

7.  Debt

 

Debt consisted of the following:

 

		June 30,			December 31,
		2014			2013
		(in millions)
Unsecured revolving credit facility due April 4, 2018		$	520.0		$	480.0
Senior unsecured term loan due from September 30, 2014 to April 4, 2018		455.0			467.5
Senior unsecured notes due November 15, 2016		350.0			350.0
Senior unsecured notes due April 15, 2023		500.0			500.0
Senior unsecured notes due November 15, 2036		250.0			250.0
Other notes and revolving credit facilities		60.5			64.8
Total		2,135.5			2,112.3
Less: unamortized discount		(3.1		)	(3.3		)
Less: amounts due within one year and short-term borrowings		(39.2		)	(36.5		)
Total long-term debt		$	2,093.2		$	2,072.5

 

Unsecured Credit Facility

 

On April 4, 2013, we entered into a syndicated Third Amended and Restated Credit Agreement with 26 banks as lenders (“Credit Agreement”). The Credit Agreement amended and restated our existing $1.5 billion unsecured revolving credit facility and provided for a $500.0 million term loan and an option to increase the revolving credit facility for up to $500.0 million at our request, subject to approval of the lenders and certain other conditions. The term loan due April 4, 2018 amortizes in quarterly installments, with an annual amortization of 5% through March 2015 and 10% thereafter until March 2018, with the balance to be paid at maturity. Interest on borrowings from the revolving credit facility during the three-month period ended June 30, 2014 was at variable rates based on LIBOR plus 1.25% or the bank prime rate plus 0.25% and included a commitment fee at an annual rate of 0.20% on the unused portion. The applicable margins over LIBOR rate and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined.

 

Weighted average rates on borrowings outstanding on the revolving credit facility were 1.40% and 1.41% as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, we had $59.2 million of letters of credit outstanding under the revolving credit facility with availability to issue an additional $190.8 million of letters of credit.

 

Senior Unsecured Notes – Publicly Traded

 

On November 20, 2006 we entered into an indenture (the “2006 Indenture”), for the issuance of $600.0 million of unsecured debt securities. The total debt issued was comprised of two tranches, (a) $350.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, maturing on November 15, 2016 and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036.

 

On April 12, 2013, we entered into an indenture (the “2013 Indenture” and, together with the 2006 Indenture, the “Indentures”), for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, maturing on April 15, 2023.  The net proceeds from the issuance were used to partially fund the acquisition of Metals USA.

 

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

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

Other Notes and Revolving Credit Facilities

 

Other revolving credit facilities with a combined credit limit of approximately $21.8 million are in place for operations in Asia and Europe with combined outstanding balances of $6.0 million and $9.5 million as of June 30, 2014 and December 31, 2013, respectively.

 

Pursuant to our acquisition of Metals USA, we assumed industrial revenue bonds with combined outstanding balances of $11.9 million as of June 30, 2014 and December 31, 2013 that have maturities through 2027. Additionally, we assumed mortgage obligations pursuant to our acquisition of Travel Main, which had outstanding balances of $42.4 million and $43.0 million as of June 30, 2014 and December 31, 2013, respectively. The mortgages, which are secured by the underlying properties, have a fixed interest rate of 6.40% and scheduled amortization payments with a lump sum payment of $39.2 million due October 2016.

 

Covenants

 

The Credit Agreement requires us to maintain an interest coverage ratio and a maximum leverage ratio, among other things.

 

Our obligations under the Credit Agreement and Indentures are required to be guaranteed by certain of our 100%-owned domestic subsidiaries.  The subsidiary guarantors, together with Reliance, are required to collectively account for at least 80% of our consolidated EBITDA and 80% of consolidated tangible assets.

 

We were in compliance with all debt covenants as of June 30, 2014.

 

8.  Equity

 

Common Stock

 

During the six months ended June 30, 2014, we issued 449,141 shares of common stock in connection with the exercise of employee stock options for total proceeds of approximately $21.3 million.

 

Dividends

 

On July 22, 2014, our Board of Directors declared the 2014 third quarter cash dividend of $0.35 per share. The dividend is payable on September 12, 2014 to shareholders of record as of August 15, 2014.

 

During the six months ended June 30, 2014 we declared and paid quarterly dividends of $0.35 per share, or $54.4 million in total, compared to quarterly dividends of $0.30 per share, or $46.0 million in total, for the same period in 2013.

 

Share-Based Compensation

 

On March 25, 2014, we granted a total of 349,380 restricted stock units (“RSUs”) to key employees pursuant to our Amended and Restated Stock Option and Restricted Stock Plan. Each RSU consists of the right to receive one share of our common stock and dividend equivalent rights, subject to forfeiture, equal to the accrued cash or stock dividends where the record date for such dividends is after the grant date but before the shares vest.  Each 2014 RSU granted has a service condition and cliff vests at December 31, 2016, if the recipient is an employee on that date. In addition to the service criteria, 136,162 of the RSUs granted in 2014 also have performance goals and vest only upon the satisfaction of the service and performance criteria.  The fair value of the 2014 RSUs granted was $71.15, the closing price of our common stock on the day before the grant.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

Share Repurchase Program

 

As of June 30, 2014, 7,883,033 shares of common stock remain authorized for repurchase under our stock repurchase program. No shares were repurchased in 2014 or 2013. Repurchased shares are redeemed and treated as authorized but unissued shares.

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss included the following:

 

					Unrealized			Pension and			Accumulated
		Foreign Currency			Gain on			Postretirement			Other
		Translation			Investments,			Benefit Adjustments,			Comprehensive
		Gain			Net of Tax			Net of Tax			Loss
		(in millions)
Balance as of December 31, 2013		$	3.2		$	0.2		$	(10.1	)	$	(6.7	)
Current-period change		5.3			0.1			—			5.4
Balance as of June 30, 2014		$	8.5		$	0.3		$	(10.1	)	$	(1.3	)

 

Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries. Unrealized gain on investments and pension and postretirement benefit adjustments are net of taxes of $0.1 million and $6.9 million, respectively, as of June 30, 2014 and December 31, 2013.

 

9.  Commitments and Contingencies

 

Environmental Contingencies

 

We are currently involved with certain environmental remediation projects related to activities at former manufacturing operations of our wholly owned subsidiary Earle M. Jorgensen Company (“EMJ”) that were sold many years prior to our acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ had insurance policies in place at the time they owned the manufacturing operations that are expected to cover the majority of the related costs. We do not expect that these obligations will have a material adverse impact on our financial position, results of operations or cash flows.

 

Legal Matters

 

On April 29, 2014, a judgment was entered against the Company and its subsidiary, Chapel Steel Corp. (“Chapel”), along with four other co-defendants, in an antitrust lawsuit filed in the United States District Court for the Southern District of Texas. As previously disclosed, Reliance has been involved in this legal proceeding brought by two former employees who left the Company to start their own business and claim that Reliance and the co-defendants engaged in anticompetitive activities. The judgment, entered against all defendants jointly and severally, awarded the plaintiff $156 million in damages, representing a trebling under federal antitrust laws of the jury verdict of $52 million in damages. On May 27, 2014 the judgment was reduced to $153.5 million. All remaining defendants, including Reliance and Chapel, have filed Notices of Appeal to the United States Court of Appeals for the Fifth Circuit seeking to have the judgment reversed, altered, or amended. Execution on the judgment is stayed pending the appeal. Despite the judgment, Reliance currently believes a reasonable range of its potential loss in this matter is between $10.0 million and $38.4 million.  The low end of the estimated range of potential loss is based on our current belief that we may be successful in our efforts, including the appeal or other proceeding, in reducing the judgment and/or settling this matter.  The high end of the estimated range of potential loss represents our estimate of Reliance’s maximum share of the judgment should we be unsuccessful in reducing the judgment or settling the matter at a lower amount.  We have determined that no amount within this range is a better estimate than any other amount and, therefore, have recognized a contingent liability equal to the minimum amount of the range. Our estimated range of potential loss is based on our opinion regarding the current status and likelihood of final

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

resolution through appeal or other proceedings, and could change as a result of developments in the appeal or other proceedings or if the likelihood of settlement changes.  The ultimate financial obligation resulting from resolution of this matter could vary, perhaps materially, from our estimated range of potential loss.

 

From time to time, we are named as a defendant in legal actions. Generally, these actions arise out of our normal course of business. Except as disclosed above, we are not a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these other matters will be resolved without a material adverse effect on our results of operations or financial condition. We maintain liability insurance against risks arising out of our ordinary course of business.

 

10.  Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2014			2013			2014			2013
		(in millions, except share and per share amounts)
Numerator:
Net income attributable to Reliance		$	96.5		$	81.0		$	183.7		$	164.7
Denominator:
Denominator for basic earnings per share:
Weighted average shares		77,735,301			76,695,598			77,621,983			76,497,454
Effect of dilutive securities:
Stock options, restricted stock, and RSUs		1,042,451			773,519			946,439			778,557
Denominator for dilutive earnings per share:
Adjusted weighted average shares and assumed conversions		78,777,752			77,469,117			78,568,422			77,276,011
Net income per share attributable to Reliance shareholders – diluted		$	1.22		$	1.05		$	2.34		$	2.13
Net income per share attributable to Reliance shareholders – basic		$	1.24		$	1.06		$	2.37		$	2.15

 

The computations of earnings per share for the three months ended June 30, 2014 and 2013 do not include 46,255 and 144,143 weighted average shares, respectively, for stock options and RSU’s, because their inclusion would have been anti-dilutive.

 

The computations of earnings per share for the six months ended June 30, 2014 and 2013 do not include 31,940 and 313,912 weighted average shares, respectively, for stock options and RSU’s, because their inclusion would have been anti-dilutive.

 

11.  Condensed Consolidating Financial Statements

 

In November 2006 and April 2013, we issued senior unsecured notes in the aggregate principal amount of $1.1 billion, at fixed interest rates that are guaranteed by certain of our 100%-owned domestic subsidiaries that also guarantee borrowings under the Credit Agreement. The accompanying 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 our ability to obtain funds from any of the guarantor subsidiaries by dividends or loans. 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.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

Condensed Unaudited Consolidating Balance Sheet
As of June 30, 2014

(in millions)

 

								Non-
					Guarantor			Guarantor			Consolidating
		Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets
Cash and cash equivalents		$	49.4		$	(11.0	)	$	75.1		$	—		$	113.5
Accounts receivable, less allowance for doubtful accounts		79.7			992.9			96.6			—			1,169.2
Inventories		64.9			1,549.5			155.5			—			1,769.9
Income taxes receivable		52.2			—			—			(52.2		)	—
Intercompany receivables		0.6			17.7			1.4			(19.7		)	—
Other current assets		115.0			50.1			14.6			(76.9		)	102.8
Total current assets		361.8			2,599.2			343.2			(148.8		)	3,155.4
Investments in subsidiaries		4,645.3			219.2			—			(4,864.5		)	—
Property, plant and equipment, net		103.9			1,306.5			197.4			—			1,607.8
Goodwill		23.8			1,549.8			102.7			—			1,676.3
Intangible assets, net		33.0			1,037.0			116.2			—			1,186.2
Intercompany receivables		1,365.0			84.5			10.2			(1,459.7		)	—
Other assets		22.6			61.1			5.3			—			89.0
Total assets		$	6,555.4		$	6,857.3		$	775.0		$	(6,473.0	)	$	7,714.7
Liabilities & Equity
Accounts payable		$	40.4		$	414.6		$	22.5		$	(19.7	)	$	457.8
Accrued compensation and retirement costs		13.3			81.9			9.8			—			105.0
Other current liabilities		63.7			82.6			68.1			(53.9		)	160.5
Deferred income taxes		—			75.2			—			(75.2		)	—
Current maturities of long-term debt and short-term borrowings		31.5			—			7.7			—			39.2
Total current liabilities		148.9			654.3			108.1			(148.8		)	762.5
Long-term debt		2,040.6			5.7			46.9			—			2,093.2
Intercompany borrowings		—			1,312.2			147.5			(1,459.7		)	—
Other long-term liabilities		321.6			445.3			37.9			—			804.8
Total Reliance shareholders’ equity		4,044.3			4,433.3			431.2			(4,864.5		)	4,044.3
Noncontrolling interests		—			6.5			3.4			—			9.9
Total equity		4,044.3			4,439.8			434.6			(4,864.5		)	4,054.2
Total liabilities and equity		$	6,555.4		$	6,857.3		$	775.0		$	(6,473.0	)	$	7,714.7

 

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