RELIANCE STEEL & ALUMINUM CO - Quarter Report: 2014 March (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 March 31, 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 April 30, 2014, 77,712,803 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 March 31, 2014 and December 31, 2013	1
	Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013	2
	Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013	3
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II -- OTHER INFORMATION		27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	27
SIGNATURES		28
EXHIBIT INDEX		29

 

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

 

		March 31,			December 31,
		2014			2013*
Current assets:
Cash and cash equivalents		$	113.6		$	83.6
Accounts receivable, less allowance for doubtful accounts of $20.0 at March 31, 2014 and $18.9 at December 31, 2013		1,160.1			983.5
Inventories		1,656.2			1,540.0
Prepaid expenses and other current assets		56.3			59.0
Income taxes receivable		—			33.9
Deferred income taxes		38.9			38.9
Total current assets		3,025.1			2,738.9
Property, plant and equipment:
Land		191.7			191.7
Buildings		945.3			934.6
Machinery and equipment		1,363.8			1,350.3
Accumulated depreciation		(906.8		)	(872.7		)
		1,594.0			1,603.9
Goodwill		1,690.3			1,691.6
Intangible assets, net		1,196.7			1,213.8
Cash surrender value of life insurance policies, net		42.9			45.4
Investments in unconsolidated entities		14.7			14.1
Other assets		33.0			33.3
Total assets		$	7,596.7		$	7,341.0
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	457.3		$	280.3
Accrued expenses		107.8			91.1
Accrued compensation and retirement costs		87.9			119.5
Accrued insurance costs		48.0			46.0
Current maturities of long-term debt and short-term borrowings		36.8			36.5
Income taxes payable		8.4			—
Total current liabilities		746.2			573.4
Long-term debt		2,091.0			2,072.5
Long-term retirement costs		83.8			84.0
Other long-term liabilities		36.1			35.9
Deferred income taxes		689.6			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 — 77,666,153 at March 31, 2014 and 77,492,017 at December 31, 2013, stated capital		831.6			818.3
Retained earnings		3,123.4			3,063.0
Accumulated other comprehensive loss		(15.5		)	(6.7		)
Total Reliance shareholders’ equity		3,939.5			3,874.6
Noncontrolling interests		10.5			9.8
Total equity		3,950.0			3,884.4
Total liabilities and equity		$	7,596.7		$	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 Ended March 31,
		2014			2013
Net sales		$	2,553.0		$	2,025.3
Costs and expenses:
Cost of sales (exclusive of depreciation
and amortization shown below)		1,905.8			1,496.5
Warehouse, delivery, selling, general and
administrative		441.0			357.7
Depreciation and amortization		51.9			41.1
		2,398.7			1,895.3
Operating income		154.3			130.0
Other income (expense):
Interest		(20.2		)	(13.1		)
Other income, net		—			2.9
Income before income taxes		134.1			119.8
Income tax provision		46.2			35.3
Net income		87.9			84.5
Less: Net income attributable to noncontrolling interests		0.7			0.8
Net income attributable to Reliance		$	87.2		$	83.7
Earnings per share:
Diluted earnings per common share attributable to
Reliance shareholders		$	1.11		$	1.09
Basic earnings per common share attributable to
Reliance shareholders		$	1.13		$	1.10
Cash dividends per share		$	0.35		$	0.30

 

 

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 March 31,
		2014			2013
Net income		$	87.9		$	84.5
Other comprehensive (loss) income:
Foreign currency translation loss		(8.9		)	(10.1		)
Unrealized gain on investments, net of tax		0.1			0.2
Total other comprehensive loss		(8.8		)	(9.9		)
Comprehensive income		79.1			74.6
Less: comprehensive income attributable to noncontrolling interests		0.7			0.8
Comprehensive income attributable to Reliance		$	78.4		$	73.8

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

		Three Months Ended
		March 31,
		2014			2013
Operating activities:
Net income		$	87.9		$	84.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		51.9			41.1
Deferred income tax (benefit) provision		(0.7		)	1.6
(Gain) loss on sales of property, plant and equipment		(0.5		)	0.2
Equity in earnings of unconsolidated entities		(0.6		)	(0.3		)
Dividend received from unconsolidated entity		—			0.3
Share-based compensation expense		4.9			6.7
Other		2.1			(1.6		)
Changes in operating assets and liabilities:
Accounts receivable		(177.6		)	(134.8		)
Inventories		(114.6		)	(48.2		)
Prepaid expenses and other assets		43.9			31.3
Accounts payable and other liabilities		172.1			91.4
Net cash provided by operating activities		68.8			72.2
Investing activities:
Purchases of property, plant and equipment		(28.9		)	(26.8		)
Other		(9.1		)	7.3
Net cash used in investing activities		(38.0		)	(19.5		)
Financing activities:
Net short-term debt borrowings		0.3			3.1
Proceeds from long-term debt borrowings		160.0			50.0
Principal payments on long-term debt		(141.7		)	(110.0		)
Payment to noncontrolling interest holder		—			(0.7		)
Dividends paid		(27.1		)	(22.9		)
Excess benefit (tax deficit) from share-based compensation		0.3			(0.8		)
Exercise of stock options		8.4			31.6
Net cash provided by (used in) financing activities		0.2			(49.7		)
Effect of exchange rate changes on cash		(1.0		)	(0.5		)
Increase in cash and cash equivalents		30.0			2.5
Cash and cash equivalents at beginning of year		83.6			97.6
Cash and cash equivalents at end of period		$	113.6		$	100.1
Supplemental cash flow information:
Interest paid during the period		$	5.2		$	4.4
Income taxes paid during the period, net		$	5.3		$	9.8

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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 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 three months ended March 31, 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. generally accepted accounting principles 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

 

Comprehensive Income Reporting and Disclosures—On January 1, 2013, we adopted changes issued by the Financial Accounting Standards Board (“FASB”), which require additional disclosures for the reclassification of significant amounts from accumulated other comprehensive income (loss) to net income. This guidance requires that the effect of certain significant amounts be presented either on the face of the consolidated statements of comprehensive income or in a single note. For other amounts, we are required to cross-reference disclosures that provide additional detail about those amounts. The adoption of these changes did not have a material impact on our consolidated financial statements.

 

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 three months ended March 31, 2014 were $8.0 million.

 

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

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

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 three months ended March 31, 2014 were $454.5 million.

 

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 existing revolving credit facility (see Note 7). During the three months ended March 31, 2013 we incurred approximately $3.1 million in transaction related costs, which are included in warehouse, delivery, selling, general and administration expenses.

 

The allocation of the total purchase price of Metals USA to the fair values of assets acquired and liabilities assumed is 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

 

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 March 31, 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 ended March 31, 2013 excluded approximately $5.2 million of acquisition and related costs.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

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
		March 31, 2013
		(in millions, except
		per share amounts)
Pro forma:
Net sales		$	2,484.4
Net income attributable to Reliance		$	88.4
Diluted earnings per common share
attributable to Reliance shareholders		$	1.15
Basic earnings per common share
attributable to Reliance shareholders		$	1.16

 

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
Effect of foreign currency translation		(2.5		)
Balance at March 31, 2014		$	1,690.3

 

We had no accumulated impairment losses related to goodwill as of March 31, 2014.

 

5.  Intangible Assets, net

 

Intangible assets, net consisted of the following:

 

		March 31, 2014						December 31, 2013
		Gross						Gross
		Carrying			Accumulated			Carrying			Accumulated
		Amount			Amortization			Amount			Amortization
		(in millions)
Intangible assets subject to amortization:
Covenants not to compete		$	8.0		$	(7.3	)	$	8.0		$	(7.3	)
Loan fees		41.5			(24.9		)	41.5			(24.1		)
Customer lists/relationships		652.0			(212.6		)	654.3			(200.6		)
Software – internal use		8.1			(6.5		)	8.1			(6.3		)
Other		7.4			(3.2		)	7.4			(2.7		)
		717.0			(254.5		)	719.3			(241.0		)
Intangible assets not subject to amortization:
Trade names		734.2			—			735.5			—
		$	1,451.2		$	(254.5	)	$	1,454.8		$	(241.0	)

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

We recognized amortization expense for intangible assets of $14.1 million and $11.3 million for the three months ended March 31, 2014 and 2013, respectively. Other changes in intangible assets, net during the three months ended March 31, 2014 are due to foreign currency translation losses of $3.0 million.

 

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

 

		(in millions)
2014		$	41.6
2015		53.6
2016		51.9
2017		47.4
2018		41.2
2019		40.5

 

6.  Income Taxes

 

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

 

7.  Debt

 

Debt consists of the following:

 

		March 31,			December 31,
		2014			2013
		(in millions)
Unsecured revolving credit facility due April 4, 2018		$	505.0		$	480.0
Senior unsecured term loan due from June 30, 2014 to April 4, 2018		461.3			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		64.7			64.8
Total		2,131.0			2,112.3
Less: unamortized discount		(3.2		)	(3.3		)
Less: amounts due within one year and short-term borrowings		(36.8		)	(36.5		)
Total long-term debt		$	2,091.0		$	2,072.5

 

Unsecured Revolving 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 amended and restated revolving credit facility during the three-month period ending March 31, 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.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

Weighted average rates on borrowings outstanding on the revolving credit facility were 1.40% and 1.41% as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 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 our named 100%-owned domestic subsidiaries that guarantee our revolving credit facility. The senior unsecured notes include provisions that require us to make an offer to 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.

 

Other Notes and Revolving Credit Facilities

 

Other revolving credit facilities with a combined credit limit of approximately $21.6 million are in place for operations in Asia and Europe with combined outstanding balances of $9.8 million and $9.5 million as of March 31, 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 March 31, 2014 that have maturities through 2027. Additionally, we assumed mortgage obligations pursuant to our acquisition of Travel Main, which have outstanding balances of $42.7 million as of March 31, 2014. 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.

 

Additionally, our named 100%-owned domestic subsidiaries, which constitute the substantial majority of our subsidiaries, guarantee the borrowings under the Credit Agreement and the Indentures. The subsidiary guarantors, together with Reliance, are required collectively to account for at least 80% of our consolidated EBITDA and 80% of consolidated tangible assets.

 

We were in compliance with all debt covenants as of March 31, 2014.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

8.  Equity

 

Common Stock

 

During the three months ended March 31, 2014, we issued 174,136 shares of common stock in connection with the exercise of employee stock options for total proceeds of approximately $8.4 million.

 

Dividends

 

On April 22, 2014, our Board of Directors declared the 2014 second quarter cash dividend of $0.35 per share. The dividend is payable on June 20, 2014 to shareholders of record as of May 30, 2014.

 

During the three months ended March 31, 2014 we declared and paid a quarterly dividend of $0.35 per share, or $27.1 million in total, compared to a quarterly dividend of $0.30 per share, or $22.9 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 the 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.

 

Share Repurchase Program

 

As of March 31, 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 (Loss)			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		(8.9		)	0.1			—			(8.8		)
Balance as of March 31, 2014		$	(5.7	)	$	0.3		$	(10.1	)	$	(15.5	)

 

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 March 31, 2014 and December 31, 2013.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

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 disclosed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2013 filed with the Securities and Exchange Commission, 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 six 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.  Reliance and Chapel disagree with the judgment and damages award and intend to pursue all available remedies, including taking the matter up on appeal. Despite the judgment, Reliance currently believes a reasonable range of its potential loss in this matter is between $10 million and $39 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 any 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 accrued 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 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.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

10.  Earnings Per Share

 

Basic earnings per share exclude any dilutive effects of options, restricted stock, RSUs, warrants and convertible securities. Diluted earnings per share are calculated including the dilutive effects of options, restricted stock, RSUs, warrants and convertible securities, if any.

 

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

 

		Three Months Ended
		March 31,
		2014			2013
		(in millions, except share and per share amounts)
Numerator:
Net income attributable to Reliance		$	87.2		$	83.7
Denominator:
Denominator for basic earnings per share:
Weighted average shares		77,507,406			76,297,108
Effect of dilutive securities:
Stock options, restricted stock, and RSUs		850,426			783,595
Denominator for dilutive earnings per share:
Adjusted weighted average shares and assumed conversions		78,357,832			77,080,703
Net income per share attributable to Reliance shareholders – diluted		$	1.11		$	1.09
Net income per share attributable to Reliance shareholders – basic		$	1.13		$	1.10

 

The computations of earnings per share for the three months ended March 31, 2014 and 2013 do not include 17,625 and 483,680 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 our named 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

March 31, 2014

 

Condensed Unaudited Consolidating Balance Sheet
As of March 31, 2014

(in millions)

 

								Non-
					Guarantor			Guarantor			Consolidating
		Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets
Cash and cash equivalents		$	46.8		$	(9.5	)	$	76.3		$	—		$	113.6
Accounts receivable, less allowance for doubtful accounts		79.0			976.0			105.1			—			1,160.1
Inventories		60.5			1,449.8			145.9			—			1,656.2
Income taxes receivable		49.9			—			—			(49.9		)	—
Intercompany receivables		0.4			20.7			1.5			(22.6		)	—
Other current assets		109.2			51.9			10.6			(76.5		)	95.2
Total current assets		345.8			2,488.9			339.4			(149.0		)	3,025.1
Investments in subsidiaries		4,555.0			211.5			—			(4,766.5		)	—
Property, plant and equipment, net		100.6			1,291.1			202.3			—			1,594.0
Goodwill		23.8			1,556.8			109.7			—			1,690.3
Intangible assets, net		34.4			1,048.2			114.1			—			1,196.7
Intercompany receivables		1,376.6			112.4			10.1			(1,499.1		)	—
Other assets		20.9			64.4			5.3			—			90.6
Total assets		$	6,457.1		$	6,773.3		$	780.9		$	(6,414.6	)	$	7,596.7
Liabilities & Equity
Accounts payable		$	43.3		$	403.1		$	33.5		$	(22.6	)	$	457.3
Accrued compensation and retirement costs		9.5			69.5			8.9			—			87.9
Other current liabilities		79.5			91.5			44.4			(51.2		)	164.2
Deferred income taxes		—			75.2			—			(75.2		)	—
Current maturities of long-term debt and short-term borrowings		25.3			—			11.5			—			36.8
Total current liabilities		157.6			639.3			98.3			(149.0		)	746.2
Long-term debt		2,038.1			5.7			47.2			—			2,091.0
Intercompany borrowings		—			1,321.7			177.4			(1,499.1		)	—
Other long-term liabilities		321.9			446.6			41.0			—			809.5
Total Reliance shareholders’ equity		3,939.5			4,352.9			413.6			(4,766.5		)	3,939.5
Noncontrolling interests		—			7.1			3.4			—			10.5
Total equity		3,939.5			4,360.0			417.0			(4,766.5		)	3,950.0
Total liabilities and equity		$	6,457.1		$	6,773.3		$	780.9		$	(6,414.6	)	$	7,596.7

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

Condensed Unaudited Consolidating Balance Sheet
As of December 31, 2013

(in millions)

 

								Non-
					Guarantor			Guarantor			Consolidating
		Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets
Cash and cash equivalents		$	19.7		$	(0.8	)	$	64.7		$	—		$	83.6
Accounts receivable, less allowance for doubtful accounts		64.1			820.3			99.1			—			983.5
Inventories		52.6			1,344.8			142.6			—			1,540.0
Income taxes receivable		34.4			—			—			(0.5		)	33.9
Intercompany receivables		0.3			350.6			2.2			(353.1		)	—
Other current assets		124.8			40.8			8.9			(76.6		)	97.9
Total current assets		295.9			2,555.7			317.5			(430.2		)	2,738.9
Investments in subsidiaries		4,647.7			312.4			—			(4,960.1		)	—
Property, plant and equipment, net		100.8			1,298.7			204.4			—			1,603.9
Goodwill		23.8			1,555.7			112.1			—			1,691.6
Intangible assets, net		17.4			1,077.8			118.6			—			1,213.8
Intercompany receivables		1,219.4			22.4			394.3			(1,636.1		)	—
Other assets		20.8			66.6			5.4			—			92.8
Total assets		$	6,325.8		$	6,889.3		$	1,152.3		$	(7,026.4	)	$	7,341.0
Liabilities & Equity
Accounts payable		$	29.1		$	185.8		$	418.5		$	(353.1	)	$	280.3
Accrued compensation and retirement costs		21.1			85.9			12.5			—			119.5
Other current liabilities		53.5			63.1			22.4			(1.9		)	137.1
Deferred income taxes		—			75.2			—			(75.2		)	—
Current maturities of long-term debt and short-term borrowings		25.3			—			11.2			—			36.5
Total current liabilities		129.0			410.0			464.6			(430.2		)	573.4
Long-term debt		2,019.2			5.7			47.6			—			2,072.5
Intercompany borrowings		—			1,550.6			85.5			(1,636.1		)	—
Other long-term liabilities		303.0			466.5			41.2			—			810.7
Total Reliance shareholders’ equity		3,874.6			4,450.1			510.0			(4,960.1		)	3,874.6
Noncontrolling interests		—			6.4			3.4			—			9.8
Total equity		3,874.6			4,456.5			513.4			(4,960.1		)	3,884.4
Total liabilities and equity		$	6,325.8		$	6,889.3		$	1,152.3		$	(7,026.4	)	$	7,341.0

 

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