RELIANCE STEEL & ALUMINUM CO - Quarter Report: 2015 September (Form 10-Q)

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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 September 30, 2015

 

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  o

 

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  o

 

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 o

Non-accelerated filer o

Smaller reporting company o

 

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

Yes  o  No  þ

 

As of October 29, 2015, 71,641,148 shares of the registrant’s common stock, $0.001 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 September 30, 2015 and December 31, 2014	1
		Unaudited Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2015 and 2014	2
		Unaudited Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2015 and 2014	3
		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	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 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
	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

 

		September 30,			December 31,
		2015			2014*
Current assets:
Cash and cash equivalents		$	94.1		$	106.2
Accounts receivable, less allowance for doubtful accounts of $18.7 at September 30, 2015 and $18.3 at December 31, 2014		1,074.3			1,144.6
Inventories		1,587.3			1,752.1
Prepaid expenses and other current assets		49.3			71.8
Income taxes receivable		38.6			—
Deferred income taxes		46.4			46.4
Total current assets		2,890.0			3,121.1
Property, plant and equipment:
Land		196.6			197.5
Buildings		986.9			983.2
Machinery and equipment		1,553.8			1,479.8
Accumulated depreciation		(1,111.3		)	(1,004.1		)
		1,626.0			1,656.4
Goodwill		1,727.0			1,736.4
Intangible assets, net		1,140.7			1,227.4
Cash surrender value of life insurance policies, net		36.4			46.4
Other assets		35.5			34.7
Total assets		$	7,455.6		$	7,822.4
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	326.5		$	286.5
Accrued expenses		99.9			98.2
Accrued compensation and retirement costs		119.2			128.4
Accrued insurance costs		43.1			46.6
Current maturities of long-term debt and short-term borrowings		109.4			93.9
Income taxes payable		—			9.2
Total current liabilities		698.1			662.8
Long-term debt		1,986.1			2,208.1
Long-term retirement costs		103.9			102.2
Other long-term liabilities		29.1			28.5
Deferred income taxes		687.9			692.9
Commitments and contingencies
Equity:
Preferred stock, $0.001 par value:
Authorized shares — 5,000,000
None issued or outstanding		—			—
Common stock and additional paid-in capital, $0.001 par value:
Authorized shares — 200,000,000
Issued and outstanding shares — 72,400,959 at September 30, 2015 and 77,337,251 at December 31, 2014		532.0			819.4
Retained earnings		3,479.9			3,328.5
Accumulated other comprehensive loss		(92.1		)	(48.9		)
Total Reliance stockholders’ equity		3,919.8			4,099.0
Noncontrolling interests		30.7			28.9
Total equity		3,950.5			4,127.9
Total liabilities and equity		$	7,455.6		$	7,822.4

 

* 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						Nine Months Ended
		September 30,						September 30,
		2015			2014			2015			2014
Net sales		$	2,286.2		$	2,705.1		$	7,324.3		$	7,874.9
Costs and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		1,647.9			2,026.9			5,359.4			5,876.2
Warehouse, delivery, selling, general and administrative		428.9			472.9			1,315.8			1,358.8
Depreciation and amortization		54.4			54.0			164.6			158.6
Impairment of long-lived assets		53.3			—			53.3			—
		2,184.5			2,553.8			6,893.1			7,393.6
Operating income		101.7			151.3			431.2			481.3
Other expense:
Interest		(21.2		)	(20.8		)	(63.3		)	(61.2		)
Other expense, net		(2.8		)	(0.1		)	(3.7		)	(1.4		)
Income before income taxes		77.7			130.4			364.2			418.7
Income tax provision		24.9			33.5			116.9			136.1
Net income		52.8			96.9			247.3			282.6
Less: Net income attributable to noncontrolling interests		1.4			1.4			4.4			3.4
Net income attributable to Reliance		$	51.4		$	95.5		$	242.9		$	279.2
Earnings per share attributable to Reliance stockholders:
Diluted		$	0.69		$	1.21		$	3.21		$	3.55
Basic		$	0.70		$	1.23		$	3.24		$	3.59
Cash dividends per share		$	0.40		$	0.35		$	1.20		$	1.05

 

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						Nine Months Ended
		September 30,						September 30,
		2015			2014			2015			2014
Net income		$	52.8		$	96.9		$	247.3		$	282.6
Other comprehensive loss:
Foreign currency translation loss		(25.8		)	(17.1		)	(42.8		)	(11.8		)
Unrealized gain (loss) on investments, net of tax		—			0.1			(0.4		)	0.2
Total other comprehensive loss		(25.8		)	(17.0		)	(43.2		)	(11.6		)
Comprehensive income		27.0			79.9			204.1			271.0
Less: comprehensive income attributable to noncontrolling interests		1.4			1.4			4.4			3.4
Comprehensive income attributable to Reliance		$	25.6		$	78.5		$	199.7		$	267.6

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

		Nine Months Ended
		September 30,
		2015			2014
Operating activities:
Net income		$	247.3		$	282.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		164.6			158.6
Impairment of long-lived assets		53.3			—
Deferred income tax benefit		(3.2		)	(3.4		)
Gain on sales of property, plant and equipment		(1.9		)	(1.2		)
Stock-based compensation expense		17.6			20.1
Other		7.7			6.0
Changes in operating assets and liabilities (excluding effect of businesses acquired):
Accounts receivable		65.4			(213.9		)
Inventories		156.8			(333.0		)
Prepaid expenses and other assets		(16.1		)	46.1
Accounts payable and other liabilities		24.8			200.9
Net cash provided by operating activities		716.3			162.8
Investing activities:
Purchases of property, plant and equipment		(119.4		)	(134.4		)
Acquisitions, net of cash acquired		—			(145.0		)
Proceeds from sale of business, net		—			26.2
Other		5.6			(8.0		)
Net cash used in investing activities		(113.8		)	(261.2		)
Financing activities:
Net short-term debt borrowings		9.9			4.3
Proceeds from long-term debt borrowings		510.0			535.7
Principal payments on long-term debt		(729.0		)	(368.6		)
Dividends and dividend equivalents paid		(90.7		)	(81.7		)
Exercise of stock options		11.0			27.9
Share repurchases		(313.9		)	—
Other		(5.5		)	(2.1		)
Net cash (used in) provided by financing activities		(608.2		)	115.5
Effect of exchange rate changes on cash		(6.4		)	—
(Decrease) increase in cash and cash equivalents		(12.1		)	17.1
Cash and cash equivalents at beginning of year		106.2			83.6
Cash and cash equivalents at end of period		$	94.1		$	100.7
Supplemental cash flow information:
Interest paid during the period		$	46.5		$	46.4
Income taxes paid during the period, net		$	168.3		$	103.7
Non-cash investing and financing activities:
Debt assumed in connection with acquisition		$	—		$	41.7

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

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. GAAP 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 nine months ended September 30, 2015 are not necessarily indicative of the results for the full year ending December 31, 2015. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2014, 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. All significant intercompany accounts and transactions have been eliminated. 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.

 

2.  Impact of Recently Issued Accounting Guidance

 

Impact of Recently Issued Accounting Standards—Adopted

 

Simplifying the Presentation of Debt Issuance Costs—In April 2015, the Financial Accounting Standards Board (“FASB”) issued accounting changes, which simplify the presentation of debt issuance costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. We adopted these accounting changes on April 1, 2015, which resulted in a $14.2 million reduction of our Intangible assets, net and Long-term debt at December 31, 2014.

 

Impact of Recently Issued Accounting Standards—Not Yet Adopted

 

Simplifying the Measurement of Inventory—In July 2015, the FASB issued accounting changes, which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance is not applicable for inventory measured under the LIFO method or the retail inventory method. The guidance will be effective for fiscal years beginning after December 15, 2016 with early adoption permitted. We do not expect this standard will have a material impact on our consolidated financial statements.

 

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. The guidance will be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. We are evaluating the new standard, but do not expect this standard will have a material impact on our consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

3.  Acquisitions

 

2014 Acquisitions

 

On December 1, 2014, we acquired Fox Metals and Alloys, Inc. (“Fox”), a Houston, Texas-based steel distributor specializing in alloy, carbon and stainless steel bar and plate products, primarily servicing OEMs and machine shops that manufacture or support the manufacturing of equipment for the oil, gas and petrochemical industries. Fox’s in-house processing services include saw cutting, plate burning and testing. Net sales of Fox for the nine months ended September 30, 2015 were $18.8 million.

 

On August 1, 2014, we acquired Aluminium Services UK Limited, the parent holding company of All Metal Services (“AMS”). AMS provides comprehensive materials management solutions to aerospace and defense OEMs and their subcontractors on a global basis, supporting customers in more than 40 countries worldwide. AMS offers a broad range of aerospace metals including aluminum, stainless, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials. AMS also offers in-house machining and water-jet cutting for more complex requirements. AMS has eight locations in four countries including China, France, Malaysia, and the United Kingdom. Net sales of AMS for the nine months ended September 30, 2015 were $196.5 million.

 

On August 1, 2014, we acquired Northern Illinois Steel Supply Co. (“NIS”), a value-added distributor and fabricator of a variety of steel and non-ferrous metal products, primarily structural steel components and parts, located in Channahon, Illinois. Net sales of NIS for the nine months ended September 30, 2015 were $14.5 million.

 

We funded these acquisitions with borrowings on our revolving credit facility and cash on hand.

 

The preliminary allocation of the total purchase price of our 2014 acquisitions to the fair values of the assets acquired and liabilities assumed was as follows:

 

		(in millions)
Cash		$	1.6
Accounts receivable		67.1
Inventories		89.2
Property, plant and equipment		23.4
Goodwill		51.3
Intangible assets subject to amortization		37.5
Intangible assets not subject to amortization		39.0
Other current and long-term assets		1.5
Total assets acquired		310.6
Deferred taxes		9.0
Current and long-term debt		39.2
Other current and long-term liabilities		53.1
Total liabilities assumed		101.3
Net assets acquired		$	209.3

 

Purchase price allocations

 

All of 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 September 30, 2015 and December 31, 2014. The purchase price allocation for the 2014 acquisition of Fox is preliminary and is pending the completion of various pre-acquisition period income tax returns. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

4.  Goodwill

 

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

 

		(in millions)
Balance at January 1, 2015		$	1,736.4
Acquisitions		0.4
Purchase price allocation adjustment		(0.4		)
Effect of foreign currency translation		(9.4		)
Balance at September 30, 2015		$	1,727.0

 

We had no accumulated impairment losses related to goodwill at September 30, 2015.

 

5.  Intangible Assets, net

 

Intangible assets, net consisted of the following:

 

				September 30, 2015						December 31, 2014
		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		4.4		$	1.4		$	(1.0	)	$	2.3		$	(1.7	)
Customer lists/relationships		14.2		685.8			(299.1		)	694.7			(249.3		)
Software – internal use		10.0		8.1			(7.7		)	8.1			(7.1		)
Other		5.3		6.4			(4.7		)	7.2			(4.5		)
				701.7			(312.5		)	712.3			(262.6		)
Intangible assets not subject to amortization:
Trade names				751.5			—			777.7			—
				$	1,453.2		$	(312.5	)	$	1,490.0		$	(262.6	)

 

We recognized amortization expense for intangible assets of $41.0 million and $42.3 million for the nine months ended September 30, 2015 and 2014, respectively. Foreign currency translation losses related to intangible assets, net, were approximately $11.0 million during the nine months ended September 30, 2015. Impairment losses of $21.2 million related to five of our trade names and $14.4 million related to two of our customer relationships were recognized during the three months and nine months ended September 30, 2015. See “Note 11 - Impairment of Long-Lived Assets” for further discussion of our impairment losses. No impairment losses were recognized during the nine months ended September 30, 2014.

 

The following is a summary of estimated aggregate amortization expense for the remaining three months of 2015 and each of the succeeding five years:

 

		(in millions)
2015		$	12.7
2016		49.5
2017		45.2
2018		40.9
2019		40.8
2020		40.8

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

6.  Debt

 

Debt consisted of the following:

 

		September 30,			December 31,
		2015			2014
		(in millions)
Unsecured revolving credit facility due April 4, 2018		$	489.0		$	675.0
Unsecured term loan due from December 31, 2015 to April 4, 2018		411.3			442.5
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		109.5			101.6
Total		2,109.8			2,319.1
Less: unamortized discount and debt issuance costs		(14.3		)	(17.1		)
Less: amounts due within one year and short-term borrowings		(109.4		)	(93.9		)
Total long-term debt		$	1,986.1		$	2,208.1

 

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 10% until March 2018, with the balance to be paid at maturity. Interest on borrowings from the revolving credit facility and term loan during the three-month period ended September 30, 2015 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 of the revolving credit facility. 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 in the Credit Agreement.

 

Weighted average interest rates on borrowings outstanding on the revolving credit facility and term loan were 1.44% and 1.42% as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, we had $489.0 million of outstanding borrowings, $58.8 million of letters of credit issued and $952.2 million available on the revolving credit facility.

 

Senior Unsecured Notes

 

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 of these notes were used to partially fund the acquisition of Metals USA Holdings Corp. (“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 both 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

September 30, 2015

 

Other Notes and Revolving Credit Facilities

 

Other revolving credit facilities with a combined credit limit of approximately $77.9 million are in place for operations in Asia and Europe with combined outstanding balances of $57.5 million and $48.3 million as of September 30, 2015 and December 31, 2014, respectively.

 

In connection with our acquisition of Metals USA, we assumed industrial revenue bonds with combined outstanding balances of $11.2 million and $11.5 million as of September 30, 2015 and December 31, 2014, respectively, and maturities through 2027. Additionally, we assumed mortgage obligations pursuant to our acquisition of a portfolio of real estate properties that we were leasing, which have outstanding balances of $40.8 million and $41.8 million as of September 30, 2015 and December 31, 2014, 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 material covenants in our debt agreements at September 30, 2015.

 

7.  Income Taxes

 

Our effective income tax rates for the three-month periods ended September 30, 2015 and 2014 were 32.1% and 25.7%, respectively. Our effective income tax rates for the nine-month periods ended September 30, 2015 and 2014 were 32.1% and 32.5%, respectively. Our 2014 three-month period effective income tax rate was favorably impacted by the resolution of certain tax matters. Permanent items that lowered our effective income tax rates from the federal statutory rate were not materially different 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%.

 

8.  Equity

 

Reincorporation

 

During the second quarter of 2015, the Company’s shareholders approved the reincorporation of the Company from California to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary. The reincorporation did not result in any change in the Company’s business, physical location, management, assets, liabilities, net worth or number of authorized shares. In the reincorporation, the Company’s Restated Certificate of Incorporation established par value of the Company’s common stock and unissued preferred stock of $0.001 per share.

 

Common Stock and Share Repurchase Plan

 

We repurchase shares of our common stock through open market purchases under a plan complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Since initiating the share repurchase plan in 1994 we have purchased approximately 22.1 million shares at an average cost of $30.93 per share. On October 20, 2015, our Board of Directors amended our share repurchase plan increasing the authorized number of shares available to be repurchased by 7.5 million and extending the program through December 31, 2018. As of October 30, 2015, we had authorization to purchase a total of 8.4 million shares under our existing share repurchase plan. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

Common stock and additional paid-in capital activity included the following:

 

		Three Months Ended								Nine Months Ended
		September 30, 2015								September 30, 2015
							Weighted Average								Weighted Average
							Exercise/(Purchase)								Exercise/(Purchase)
		Shares		Amount			Price			Shares		Amount			Price
		(in millions, except share and per share amounts)
Stock-based compensation		—		$	5.2		—			271,438		$	17.6		—
Stock options exercised		9,512		0.4			$	42.87		218,524		11.0			$	52.00
Share repurchases(1)		(2,514,654	)	(142.3		)	$	(56.60	)	(5,953,054	)	(342.3		)	$	(57.50	)
Total		(2,505,142	)	$	(136.7	)				(5,463,092	)	$	(313.7	)

 

(1) Includes 526,800 shares for $28.4 million pending settlement at September 30, 2015, but does not reflect 241,511 additional shares purchased in October 2015.

 

Dividends

 

On October 20, 2015, our Board of Directors declared the 2015 fourth quarter cash dividend of $0.40 per share. The dividend is payable on December 18, 2015 to stockholders of record as of November 20, 2015.

 

During the three months ended September 30, 2015, we declared and paid a quarterly dividend of $0.40 per share, or $29.3 million in total, compared to a quarterly dividend of $0.35 per share, or $27.3 million in total, for the same period in 2014. During the nine months ended September 30, 2015, we declared and paid quarterly dividends of $1.20 per share, or $89.7 million in total, compared to quarterly dividends of $1.05 per share, or $81.7 million in total, for the same period in 2014. During the nine months ended September 30, 2015, we also paid $1.0 million in dividend equivalents with respect to vested RSUs.

 

Stock-Based Compensation

 

We annually grant time-based and performance-based RSUs, which have both service and performance goal criteria, to officers and key employees that generally have 3-year vesting periods. Additionally, we grant restricted stock to the non-employee members of the Board of Directors. The fair value of the RSUs and restricted stock is determined based on the closing stock price of our common stock on the grant date.

 

A summary of the status of our unvested restricted stock grants and time-based and performance-based RSUs as of September 30, 2015 and changes during the nine-month period then ended is as follows:

 

				Weighted
				Average
				Grant Date
Unvested RSUs and Restricted Stock		Shares		Fair Value
Unvested at January 1, 2015		846,760		$	65.10
Granted(1)		570,479		59.42
Vested		(105,119	)	59.46
Canceled		(99,630	)	58.56
Unvested at September 30, 2015		1,212,490		$	63.90
Shares reserved for future grants (all plans)		2,096,472

 

(1)             557,760 RSUs, including 225,450 performance-based RSUs, and 12,719 restricted stock grants.

 

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RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss included the following:

 

					Unrealized			Pension and			Accumulated
		Foreign Currency			Gain (Loss) on			Postretirement			Other
		Translation			Investments,			Benefit Adjustments,			Comprehensive
		Loss			Net of Tax			Net of Tax			Loss
		(in millions)
Balance as of January 1, 2015		$	(23.2	)	$	0.4		$	(26.1	)	$	(48.9	)
Current-period change		(42.8		)	(0.4		)	—			(43.2		)
Balance as of September 30, 2015		$	(66.0	)	$	—		$	(26.1	)	$	(92.1	)

 

Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries. Pension and postretirement benefit adjustments are net of taxes of $15.6 million as of September 30, 2015 and December 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 Earle M. Jorgensen Company (“EMJ”), our 100%-owned subsidiary, that were sold many years prior to Reliance’s 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 have covered costs incurred to-date, and are expected to continue to cover the majority of the remaining costs. We do not expect that these obligations will have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

Legal Matters

 

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 a material adverse effect on our results of operations, financial condition or cash flows. 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

September 30, 2015

 

10.  Earnings Per Share

 

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

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2015			2014			2015			2014
		(in millions, except share and per share amounts)
Numerator:
Net income attributable to Reliance		$	51.4		$	95.5		$	242.9		$	279.2
Denominator:
Weighted average shares outstanding		73,316,356			77,945,375			74,903,472			77,730,965
Dilutive effect of stock-based awards		819,837			938,806			770,124			943,894
Weighted average diluted shares outstanding		74,136,193			78,884,181			75,673,596			78,674,859
Earnings per share attributable to Reliance stockholders:
Diluted		$	0.69		$	1.21		$	3.21		$	3.55
Basic		$	0.70		$	1.23		$	3.24		$	3.59

 

Potentially dilutive securities whose effect would have been antidilutive were not significant for the three-month and nine-month periods ended September 30, 2015 and 2014.

 

11.  Impairment of Long-Lived Assets

 

In the three months and nine months ended September 30, 2015, we recorded a $53.3 million impairment charge of long-lived assets primarily related to certain of our energy-related businesses as a result of the impact to our businesses from continued low crude oil prices and the resulting decline in the demand for the products we sell to the energy market (oil and gas). This included a charge of $17.7 million for property, plant, and equipment directly related to the planned closure of certain of our energy-related businesses where we anticipate losses on the disposition of certain assets and an impairment charge of $35.6 million related to our intangible assets, net due to the loss of customers and lowered expectations of future profitability. The measurement of these assets at fair value was determined using a combination of discounted cash flow techniques for intangible assets and the market approach for property, plant, and equipment.

 

12.  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 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

September 30, 2015

 

Condensed Unaudited Consolidating Balance Sheet

As of September 30, 2015

(in millions)

 

								Non-
					Guarantor			Guarantor			Consolidating
		Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
Assets
Cash and cash equivalents		$	13.6		$	(7.1	)	$	87.6		$	—		$	94.1
Accounts receivable, net		78.4			850.2			164.9			(19.2		)	1,074.3
Inventories		46.3			1,293.2			247.8			—			1,587.3
Income taxes receivable		82.2			—			—			(43.6		)	38.6
Other current assets		121.9			37.3			15.2			(78.7		)	95.7
Total current assets		342.4			2,173.6			515.5			(141.5		)	2,890.0
Investments in subsidiaries		5,011.9			286.0			—			(5,297.9		)	—
Property, plant and equipment, net		107.9			1,309.2			208.9			—			1,626.0
Goodwill		23.8			1,571.1			132.1			—			1,727.0
Intangible assets, net		14.6			987.9			138.2			—			1,140.7
Intercompany receivables		820.9			41.1			26.3			(888.3		)	—
Other assets		24.3			41.9			5.7			—			71.9
Total assets		$	6,345.8		$	6,410.8		$	1,026.7		$	(6,327.7	)	$	7,455.6
Liabilities & Equity
Accounts payable		$	32.4		$	234.4		$	78.9		$	(19.2	)	$	326.5
Accrued compensation and retirement costs		22.2			86.3			10.7			—			119.2
Other current liabilities		71.2			60.4			57.9			(46.5		)	143.0
Deferred income taxes		—			75.2			0.6			(75.8		)	—
Current maturities of long-term debt and short-term borrowings		50.0			—			59.4			—			109.4
Total current liabilities		175.8			456.3			207.5			(141.5		)	698.1
Long-term debt		1,935.9			5.7			44.5			—			1,986.1
Intercompany borrowings		—			733.2			155.1			(888.3		)	—
Other long-term liabilities		314.3			455.5			51.1			—			820.9
Total Reliance stockholders’ equity		3,919.8			4,753.6			544.3			(5,297.9		)	3,919.8
Noncontrolling interests		—			6.5			24.2			—			30.7
Total equity		3,919.8			4,760.1			568.5			(5,297.9		)	3,950.5
Total liabilities and equity		$	6,345.8		$	6,410.8		$	1,026.7		$	(6,327.7	)	$	7,455.6

 

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