e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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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)
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California
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95-1142616 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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 is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of July 31, 2007, 76,291,616 shares of the registrants common stock, no par value, were
outstanding.
RELIANCE STEEL & ALUMINUM CO.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PART I FINANCIAL INFORMATION |
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1 |
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1 |
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2 |
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3 |
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4 |
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5 |
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24 |
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30 |
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30 |
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31 |
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31 |
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31 |
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31 |
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32 |
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33 |
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CERTIFICATIONS |
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34 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32 |
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i
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
74,950 |
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$ |
57,475 |
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Accounts receivable, less allowance for doubtful accounts of
$19,720 at June 30, 2007 and $16,755 at December 31, 2006 |
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837,936 |
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666,273 |
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Inventories |
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1,100,470 |
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904,318 |
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Prepaid expenses and other current assets |
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22,157 |
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22,179 |
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Income taxes receivable |
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25,144 |
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Total current assets |
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2,035,513 |
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1,675,389 |
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Property, plant and equipment, at cost: |
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Land |
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110,435 |
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108,022 |
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Buildings |
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407,469 |
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385,851 |
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Machinery and equipment |
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612,201 |
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565,951 |
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Accumulated depreciation |
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(348,307 |
) |
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(317,152 |
) |
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781,798 |
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742,672 |
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Goodwill |
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918,076 |
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784,871 |
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Intangible assets, net |
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382,836 |
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354,195 |
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Cash surrender value of life insurance policies, net |
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44,319 |
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41,190 |
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Other assets |
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14,038 |
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15,856 |
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Total assets |
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$ |
4,176,580 |
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$ |
3,614,173 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
455,950 |
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$ |
340,356 |
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Accrued expenses |
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51,542 |
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36,481 |
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Accrued compensation and retirement costs |
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80,282 |
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92,905 |
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Accrued insurance costs |
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36,812 |
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34,475 |
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Income taxes payable |
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1,918 |
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¾ |
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Deferred income taxes |
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19,693 |
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23,706 |
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Current maturities of long-term debt |
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33,840 |
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22,257 |
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Current maturities of capital lease obligations |
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624 |
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559 |
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Total current liabilities |
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680,661 |
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550,739 |
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Long-term debt |
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1,241,716 |
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1,083,095 |
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Capital lease obligations |
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4,808 |
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4,956 |
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Long-term retirement costs |
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54,576 |
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46,111 |
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Deferred income taxes |
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187,904 |
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181,628 |
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Minority interest |
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1,450 |
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1,246 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, no par value: |
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Authorized shares 5,000,000 |
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None issued or outstanding |
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¾ |
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¾ |
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Common stock, no par value: |
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Authorized shares 100,000,000 |
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Issued and outstanding shares 76,281,228 at June 30, 2007
and 75,702,046 at December 31, 2006, stated capital |
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717,447 |
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701,690 |
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Retained earnings |
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1,274,574 |
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1,046,339 |
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Accumulated other comprehensive income /(loss) |
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13,444 |
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(1,631 |
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Total shareholders equity |
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2,005,465 |
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1,746,398 |
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Total liabilities and shareholders equity |
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$ |
4,176,580 |
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$ |
3,614,173 |
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See accompanying notes to consolidated financial statements.
1
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
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Three Months Ended |
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June 30, |
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2007 |
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2006 |
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Net sales |
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$ |
1,896,036 |
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$ |
1,559,222 |
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Other income, net |
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2,333 |
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376 |
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1,898,369 |
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1,559,598 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation and amortization shown below) |
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1,398,539 |
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1,139,349 |
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Warehouse, delivery, selling, general and administrative |
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264,549 |
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225,352 |
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Depreciation and amortization |
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19,210 |
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16,800 |
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Interest |
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19,615 |
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16,933 |
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1,701,913 |
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1,398,434 |
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Income from continuing operations before income taxes |
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196,456 |
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161,164 |
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Provision for income taxes |
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73,672 |
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60,659 |
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Net income |
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$ |
122,784 |
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$ |
100,505 |
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Earnings per share: |
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Income from continuing operations diluted |
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$ |
1.59 |
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$ |
1.32 |
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Weighted average shares outstanding diluted |
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77,181,651 |
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75,874,992 |
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Income from continuing operations basic |
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$ |
1.61 |
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$ |
1.34 |
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Weighted average shares outstanding basic |
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76,219,670 |
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75,115,438 |
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Cash dividends per share |
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$ |
.08 |
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$ |
.05 |
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See accompanying notes to consolidated financial statements.
2
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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Net sales |
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$ |
3,737,926 |
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$ |
2,547,208 |
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Other income, net |
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2,707 |
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1,654 |
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3,740,633 |
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2,548,862 |
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Costs and expenses: |
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Cost of sales (exclusive of depreciation and amortization shown below) |
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2,767,977 |
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1,857,150 |
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Warehouse, delivery, selling, general and administrative |
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520,101 |
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362,447 |
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Depreciation and amortization |
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37,661 |
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28,621 |
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Interest |
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39,725 |
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22,642 |
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3,365,464 |
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2,270,860 |
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Income from continuing operations before income taxes |
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375,169 |
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278,002 |
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Provision for income taxes |
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140,689 |
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105,642 |
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Net income |
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$ |
234,480 |
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$ |
172,360 |
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Earnings per share: |
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Income from continuing operations diluted |
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$ |
3.06 |
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$ |
2.41 |
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Weighted average shares outstanding diluted |
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76,691,529 |
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71,431,880 |
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Income from continuing operations basic |
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$ |
3.08 |
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$ |
2.44 |
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Weighted average shares outstanding basic |
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76,041,932 |
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70,721,890 |
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Cash dividends per share |
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$ |
.16 |
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$ |
.10 |
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See accompanying notes to consolidated financial statements.
3
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
234,480 |
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$ |
172,360 |
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Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
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Depreciation and amortization |
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37,661 |
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28,621 |
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Debt premium amortization |
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¾ |
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(892 |
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Gain on sales of machinery and equipment |
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(1,022 |
) |
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(401 |
) |
Deferred income taxes |
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(5,519 |
) |
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(1,244 |
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Minority interest |
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204 |
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132 |
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Stock based compensation expense |
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4,680 |
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2,712 |
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Excess tax benefits from stock based compensation |
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(5,929 |
) |
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(1,584 |
) |
(Increase) /decrease in cash surrender value of life insurance
policies |
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(77 |
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|
352 |
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Changes in operating assets and liabilities (excluding effect
of businesses acquired): |
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Accounts receivable |
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(114,824 |
) |
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(118,886 |
) |
Inventories |
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(95,029 |
) |
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(126,208 |
) |
Prepaid expenses and other assets |
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31,521 |
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(8,372 |
) |
Accounts payable and accrued expenses |
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84,093 |
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(23,757 |
) |
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Net cash provided by (used in) operating activities |
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170,239 |
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(77,167 |
) |
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Investing activities: |
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Purchases of property, plant and equipment |
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(58,645 |
) |
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(59,694 |
) |
Acquisitions of metals service centers and net asset purchases
of metals service centers, net of cash acquired |
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(217,712 |
) |
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(343,924 |
) |
Proceeds from sales of property and equipment |
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2,572 |
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|
2,247 |
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Premiums paid on life insurance policies |
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(262 |
) |
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(238 |
) |
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Net cash used in investing activities |
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(274,047 |
) |
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(401,609 |
) |
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Financing activities: |
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Proceeds from borrowings |
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542,850 |
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693,316 |
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Principal payments on long-term debt and short-term borrowings |
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(426,601 |
) |
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(235,591 |
) |
Payments to former minority shareholders |
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¾ |
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(1,291 |
) |
Dividends paid |
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(12,174 |
) |
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(7,081 |
) |
Excess tax benefits from stock based compensation |
|
|
5,929 |
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|
1,584 |
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Exercise of stock options |
|
|
10,796 |
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|
2,533 |
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Issuance of common stock |
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|
281 |
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|
222 |
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Net cash provided by financing activities |
|
|
121,081 |
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|
453,692 |
|
Effect of exchange rate changes on cash |
|
|
202 |
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|
166 |
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Increase /(decrease) in cash and cash equivalents |
|
|
17,475 |
|
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|
(24,918 |
) |
Cash and cash equivalents at beginning of period |
|
|
57,475 |
|
|
|
35,022 |
|
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Cash and cash equivalents at end of period |
|
$ |
74,950 |
|
|
$ |
10,104 |
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Supplemental cash flow information: |
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Interest paid during the period |
|
$ |
33,861 |
|
|
$ |
27,802 |
|
Income taxes paid during the period |
|
$ |
111,957 |
|
|
$ |
95,999 |
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|
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Non-cash investing and financing activities: |
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|
|
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Issuance of common stock and stock options in connection with
acquisition of metals service center |
|
$ |
¾ |
|
|
$ |
360,453 |
|
Issuance of common stock to employee retirement savings plan |
|
$ |
¾ |
|
|
$ |
2,830 |
|
See accompanying notes to consolidated financial statements.
4
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States of America 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 and six months ended June 30, 2007 are not necessarily
indicative of the results for the full year ending December 31, 2007. For further information,
refer to the consolidated financial statements and footnotes thereto for the year ended December
31, 2006, included in Reliance Steel & Aluminum Co.s Annual Report on Form 10-K.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts and the disclosure of contingent amounts in the Companys consolidated
financial statements and the accompanying notes. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year presentation.
The Companys 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 minority interest. All significant intercompany accounts and
transactions have been eliminated.
2. Impact of Recently Issued Accounting Principles
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN
No. 48), Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and
measurement principles for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. The Company adopted the provision of this interpretation effective January
1, 2007. The adoption of FIN No. 48 did not have a material impact on the Companys consolidated
financial position and results of operations. See Note 6, Income Taxes, for further discussion.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Standard defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, which is the year
beginning January 1, 2008 for the Company. The adoption of SFAS No. 157 is not expected to have a
material impact on the Companys financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, which is the year beginning
January 1, 2008 for the Company. The Company is evaluating the impact that the adoption of SFAS
No. 159 will have on its consolidated results of operations and financial condition.
5
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Acquisitions
2007 Acquisitions
Acquisition of Crest Steel Corporation
On January 2, 2007, the Company purchased all of the outstanding capital stock of Crest Steel
Corporation (Crest), a metals service center company headquartered in Carson, California with
facilities in Riverside, California and Phoenix, Arizona. Crest now operates as a wholly-owned
subsidiary of RSAC Management Corp. Crest was founded in 1963 and specializes in the processing
and distribution of carbon steel products including flat-rolled, plate, bars and structurals.
Acquisition of Industrial Metals and Surplus, Inc.
Also, on January 2, 2007, the Company, through its wholly-owned subsidiary Siskin Steel & Supply
Company, Inc., purchased the outstanding capital stock of Industrial Metals and Surplus, Inc.
(Industrial Metals), a metals service center company headquartered in Atlanta, Georgia and a
related company, Athens Steel, Inc., located in Athens, Georgia. Industrial Metals was founded in
1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled
and ornamental iron products. Industrial Metals now operates as a wholly-owned subsidiary of
Siskin. Athens Steel was merged into Industrial Metals and operates as a division of Industrial
Metals. Siskins Georgia Steel Supply Company division located in Atlanta will be combined with
the Industrial Metals operation.
Acquisition of Encore Group
As of February 1, 2007, the Company acquired the net assets and business of the Encore Group of
metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team
Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in
connection with the buyout by management and a private equity fund managed by HSBC Capital (Canada)
Inc. of certain former Corus CIC and Corus America businesses. Encore specializes in the processing
and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar
and carbon steel flat-rolled products, through its 17 facilities located mainly in Western Canada.
The Company acquired the Encore Group assets through RSAC Canada Limited (now Encore Group
Limited), the Companys wholly-owned Canadian subsidiary, and RSAC Canada (Tube) ULC (now Team Tube
Canada ULC), a subsidiary of RSAC Canada Limited. Encore Metals (USA), Inc. now operates as a
wholly-owned subsidiary of Reliance.
The total cost of the acquisitions of Crest, Industrial Metals, and Encore Group of approximately
$217,686,000 was funded with borrowings on the Companys syndicated credit facility. Total debt
assumed, net of cash, in connection with these acquisitions was approximately $51,500,000. The
consolidated financial statements reflect the allocations of each acquisitions purchase price,
which is preliminary as of June 30, 2007 for Encore Group and Industrial Metals.
2006 Acquisitions
Acquisition of Yarde Metals, Inc.
On August 1, 2006, the Company acquired 100% of the outstanding capital stock of Yarde Metals, Inc.
(Yarde Metals), a metals service center company headquartered in Southington, Connecticut for
approximately $100,000,000 plus the assumption of approximately $101,000,000 of Yarde Metals
outstanding debt, net of cash acquired. Yarde Metals was founded in 1976 and specializes in the
processing and distribution of stainless steel and aluminum plate, rod and bar products. Yarde has
additional metals service centers in Pelham, New Hampshire; East Hanover, New Jersey; Hauppauge,
New York; High Point, North Carolina; Streetsboro, Ohio; and Limerick, Pennsylvania and a sales
office in Ft. Lauderdale, Florida. Yarde Metals operates as a wholly-owned subsidiary of RSAC
Management Corp.
6
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The allocation of the total purchase price of Yarde Metals to the fair values of the assets
acquired and liabilities assumed is as follows:
|
|
|
|
|
|
|
As of August 1, 2006 |
|
|
|
(In thousands) |
|
Allocation of the total purchase price to the fair
values of assets acquired and liabilities assumed: |
|
|
|
|
Cash |
|
$ |
10,244 |
|
Accounts receivable |
|
|
53,448 |
|
Inventory |
|
|
79,987 |
|
Property, plant and equipment |
|
|
18,062 |
|
Goodwill |
|
|
47,049 |
|
Intangible assets subject to amortization |
|
|
3,100 |
|
Intangible assets not subject to amortization |
|
|
22,900 |
|
Other current and long-term assets |
|
|
5,743 |
|
|
|
|
|
Total assets acquired |
|
|
240,533 |
|
|
|
|
|
Current and long-term debt |
|
|
(111,168 |
) |
Other current and long-term liabilities |
|
|
(29,204 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(140,372 |
) |
|
|
|
|
Net assets acquired/Purchase price |
|
$ |
100,161 |
|
|
|
|
|
The acquisition of Yarde Metals was funded with borrowings on the Companys syndicated credit
facility and a short-term supplemental credit facility.
Acquisition of Earle M. Jorgensen Company
On April 3, 2006, the Company acquired Earle M. Jorgensen Company (EMJ). EMJ, headquartered in
Lynwood, California, is one of the largest distributors of metal products in North America with 40
service and processing centers. The Company paid $6.50 in cash and issued 0.1784 of a share of
Reliance common stock for each outstanding share of EMJ common stock. The fraction of the share of
Reliance common stock issued in exchange for each share of EMJ common stock as a result of the
acquisition was determined by the average daily closing sale price for Reliance common stock
reported on the New York Stock Exchange for the 20-day trading period ending with and including the
second complete trading day prior to the date that the acquisition became effective (Average Stock
Price). The Average Stock Price for that 20-day period exceeded the upper limit of the 15%
symmetrical collar established in the merger agreement. In accordance with this formula, Reliance
issued 8,962,268 shares of its common stock in exchange for the 50,237,094 shares of outstanding
EMJ common stock. The recorded value of the cash and stock consideration, in accordance with
purchase accounting rules, was $13.64 per EMJ share, the stock portion of which was calculated
using a Reliance per share price of $40.00 which was the 3-day average closing price as of the date
the Average Stock Price exceeded the upper limit of the collar. The purchase also included the
assumption of approximately $252,900,000 of EMJ outstanding debt, including $250,000,000 of 9.75%
senior secured notes and $2,900,000 of other debt. In addition, the Company cashed out certain EMJ
stock option holders for aggregate consideration of approximately $29,456,000 and incurred direct
acquisition costs of approximately $12,882,000.
The Company assumed an EMJ stock option plan and converted the outstanding EMJ options to options
to acquire 287,886 shares of Reliance common stock on the same terms and conditions as were
applicable to such options under the EMJ plan, with adjusted exercise price and number of shares to
reflect the difference in the value of the stock. The Company also assumed an obligation resulting
from EMJs settlement with the U.S. Department of
7
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Labor to contribute the equivalent of 258,006
shares of Reliance common stock to EMJs Retirement Savings Plan. At June 30, 2007 the remaining
obligation to contribute cash to a phantom stock plan supplementing the EMJ Retirement Savings Plan
consisted of the cash equivalent of 160,655 shares of Reliance common stock. This obligation will
be satisfied by future
contributions as allowed under the Internal Revenue Code and ERISA requirements. EMJ now operates
as a wholly-owned subsidiary of Reliance.
The total cost of the acquisition, including cash and stock consideration, direct acquisition costs
and value of vested options assumed, and allocation of the total purchase price to the fair values
of the assets acquired and liabilities assumed is as follows:
|
|
|
|
|
|
|
As of April 3, 2006 |
|
|
|
(In thousands) |
|
Cash consideration |
|
$ |
326,546 |
|
Value of common stock and vested stock options |
|
|
360,453 |
|
Cash out of certain EMJ stock options |
|
|
29,456 |
|
Direct acquisition costs |
|
|
12,882 |
|
|
|
|
|
Total purchase price |
|
$ |
729,337 |
|
|
|
|
|
|
Allocation of the total purchase price to the
fair values of assets acquired and liabilities
assumed: |
|
|
|
|
Cash |
|
$ |
46,091 |
|
Accounts receivable |
|
|
191,203 |
|
Inventory |
|
|
344,446 |
|
Property, plant and equipment |
|
|
185,366 |
|
Goodwill |
|
|
351,480 |
|
Intangible assets subject to amortization |
|
|
93,800 |
|
Intangible assets not subject to amortization |
|
|
187,900 |
|
Other current and long-term assets |
|
|
69,023 |
|
|
|
|
|
Total assets acquired |
|
|
1,469,309 |
|
|
|
|
|
Current and long-term debt |
|
|
(274,745 |
) |
Deferred income taxes |
|
|
(157,938 |
) |
Other current and long-term liabilities |
|
|
(307,289 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(739,972 |
) |
|
|
|
|
Net assets acquired/Purchase price |
|
$ |
729,337 |
|
|
|
|
|
The cash portion of the acquisition was funded with borrowings on the Companys syndicated
credit facility.
Acquisition of Flat Rock Metal Processing L.L.C.
In March 2006, Precision Strip, Inc., a wholly-owned subsidiary of the Company, acquired certain
assets and business of Flat Rock Metal Processing L.L.C. (Flat Rock) based in Flat Rock,
Michigan. Flat Rock was founded in 2001 and was a privately-held toll processing company with
facilities in Perrysburg, Ohio; Eldridge, Iowa; and Portage, Indiana. The Flat Rock facilities in
Perrysburg, Ohio and Eldridge, Iowa began operating as Precision Strip locations immediately after
the acquisition date. The Portage, Indiana location became operational in September 2006. In July
2006, Precision Strip made a decision to close the Eldridge, Iowa facility and did so by the end of
November 2006. Costs associated with the closure were minimal. Both Perrysburg, Ohio and Portage,
Indiana locations process and deliver carbon steel, aluminum and stainless steel products on a
toll basis, processing the metal for a fee, without taking ownership of the metal. The purchase
was funded with borrowings under the Companys line of credit.
8
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition of Everest Metals (Suzhou) Co., Ltd.
Also in March 2006, Reliance Pan Pacific Pte., Ltd. (Reliance Pan Pacific) completed its purchase
of Everest Metals, a metals service center company based near Shanghai, Peoples Republic of China.
Reliance Pan Pacific is a joint venture company formed in October 2005 that is 70% owned by
Reliance and 30% owned by Manufacturing Network Pte. Ltd. (Manufacturing Network), a Singapore
based company. Manufacturing Network sold its 100% interest in Everest Metals to Reliance Pan
Pacific on March 1, 2006. Everest Metals was formed in 2001 and began processing and distributing
primarily aluminum products to the electronics industry in 2002.
Acquisition of the minority interest in American Steel, L.L.C.
In January 2006, the Company purchased the remaining 49.5% of American Steel L.L.C., from American
Industries, Inc., the holder of the minority interest. As a result, effective January 3, 2006 the
Company includes 100% of American Steels income in its financial results. American Steel operates
as a wholly-owned subsidiary of Reliance.
Purchase price allocations
The acquisitions of all the companies have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on the estimated fair values at the date of each acquisition. The
Company utilized the services of a third-party valuation specialist to assist in identifying and
determining the fair market values and economic lives of acquired tangible and intangible assets.
The accompanying consolidated statements of income include the revenues and expenses of each
acquisition since its respective acquisition date.
Pro forma financial information
The following unaudited pro forma summary financial results present the consolidated results of
operations as if our acquisitions of Crest, EMJ, Encore Group, Industrial Metals, and Yarde Metals
had occurred at the beginning of each reporting period, after the effect of certain adjustments,
including increased depreciation expense resulting from recording fixed assets at fair value,
interest expense on the acquisition debt, amortization of certain identifiable intangible assets,
debt premium amortization from recording the EMJ senior notes at fair value, and a provision for
income taxes for the companies that were previously taxed as S-Corporations under Section 1361 of
the Internal Revenue Code. The pro forma results have been presented for comparative purposes only
and are not indicative of what would have occurred had these acquisitions been made as of January
1, 2007 or January 1, 2006, or of any potential results which may occur in the future. No pro
forma results are required for the three month period ended June 30, 2007 as all acquisitions
occurred prior to April 1, 2007.
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2006 |
|
|
(In thousands, except |
|
|
per share amounts) |
Pro forma (unaudited): |
|
|
|
|
Net sales |
|
$ |
1,783,853 |
|
Net income |
|
$ |
109,977 |
|
Earnings per share diluted |
|
$ |
1.45 |
|
Earnings per share basic |
|
$ |
1.46 |
|
9
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, 2007 |
|
June 30, 2006 |
|
|
(In thousands, except |
|
(In thousands, except |
|
|
per share amounts) |
|
per share amounts) |
Pro forma (unaudited): |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,756,371 |
|
|
$ |
3,495,402 |
|
Net income |
|
$ |
234,676 |
|
|
$ |
202,970 |
|
Earnings per share
diluted |
|
$ |
3.06 |
|
|
$ |
2.67 |
|
Earnings per share
basic |
|
$ |
3.09 |
|
|
$ |
2.70 |
|
4. Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as
follows:
|
|
|
|
|
|
|
(In thousands) |
|
Balance as of December 31, 2006 |
|
$ |
784,871 |
|
Acquisitions |
|
|
123,964 |
|
Effect of foreign currency translation |
|
|
9,241 |
|
|
|
|
|
Balance as of June 30, 2007 |
|
$ |
918,076 |
|
|
|
|
|
5. Intangible Assets, net
The following table summarizes the Companys intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
(In thousands) |
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenants not to compete |
|
$ |
6,503 |
|
|
$ |
(6,070 |
) |
|
$ |
6,353 |
|
|
$ |
(6,005 |
) |
Loan fees |
|
|
15,985 |
|
|
|
(6,024 |
) |
|
|
15,001 |
|
|
|
(5,237 |
) |
Customer list/relationships |
|
|
121,200 |
|
|
|
(13,517 |
) |
|
|
107,200 |
|
|
|
(9,749 |
) |
Software internal use |
|
|
8,100 |
|
|
|
(1,012 |
) |
|
|
8,100 |
|
|
|
(607 |
) |
Other |
|
|
691 |
|
|
|
(420 |
) |
|
|
421 |
|
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,479 |
|
|
|
(27,043 |
) |
|
|
137,075 |
|
|
|
(21,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
257,400 |
|
|
|
|
|
|
|
239,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
409,879 |
|
|
$ |
(27,043 |
) |
|
$ |
376,175 |
|
|
$ |
(21,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized amortization expense for intangible assets of approximately $5,063,000 and
$2,985,000 for the six months ended June 30, 2007 and 2006, respectively. Based on the current
amount of intangibles subject to amortization, the estimated amortization expense for the remaining
six months of 2007 and each of the succeeding five years is as follows:
|
|
|
|
|
2007 |
|
$ |
4,718,000 |
|
2008 |
|
|
9,080,000 |
|
2009 |
|
|
8,408,000 |
|
2010 |
|
|
8,334,000 |
|
2011 |
|
|
8,013,000 |
|
2012 |
|
|
7,163,000 |
|
10
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Income Taxes
On January 1, 2007, the Company adopted the provisions of FIN No. 48. As a result of the
implementation of FIN No. 48, the Company recognized no material adjustment to the liability for
unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had
approximately $5,030,000 of unrecognized tax benefits. At June 30, 2007, the Company had
approximately $4,820,000 of unrecognized tax benefits all of which would impact the effective tax
rate if recognized.
Reliance and its subsidiaries file numerous consolidated and separate income tax returns in the
United States federal jurisdiction and in many state and foreign jurisdictions. Except for various
pre-acquisition periods of newly acquired subsidiaries, the Company is no longer subject to U.S.
federal, state and local, or foreign income tax examinations for years before 2002.
The Internal Revenue Service (IRS) is currently examining the Companys 2002 through 2004 federal
income tax returns. The IRS has issued significant proposed adjustments related to certain of the
Companys inventory costing and LIFO methods. The IRS has also issued a proposed adjustment for a
pre-acquisition refund claim filed by one of the Companys subsidiaries. The Company does not
accept any of the IRS proposed adjustments and expects to contest them through the IRS
administrative proceedings. The Company is also under audit by various state and foreign
jurisdictions but does not anticipate any material adjustments from these examinations. Certain of
the current proposed adjustments are merely a timing impact or relate to pre-acquisition
contingencies and therefore would not have an effect on the Companys effective tax rate. The
Company does not anticipate that the proposed IRS adjustments, when resolved, would result in a
material charge to its results of operations or financial condition.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of January 1, 2007 and June 30, 2007, there were approximately $770,000 and $1,350,000,
respectively, of accrued interest and penalties related to uncertain tax positions.
11
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Revolving line of credit
($1,100,000,000 limit) due November 9, 2011,
interest at variable rates (based on LIBOR
plus 0.55% or the banks prime rate as of
June 30, 2007 and December 31, 2006),
weighted average rate of 6.00% and 5.80%
during the six months ended June 30, 2007
and 2006, respectively |
|
$ |
392,000 |
|
|
$ |
203,000 |
|
Senior unsecured notes due January 2, 2009,
weighted average fixed interest rate of
7.37% and 7.33% at June 30, 2007 and
December 31, 2006, respectively |
|
|
10,000 |
|
|
|
30,000 |
|
Senior unsecured notes due January 2, 2008,
weighted average fixed interest rate of
7.08% at June 30, 2007 and December 31, 2006 |
|
|
30,000 |
|
|
|
30,000 |
|
Senior unsecured notes due from October 15,
2008 to October 15, 2010, weighted average
fixed interest rate of 6.66% at June 30,
2007 and December 31, 2006 |
|
|
103,000 |
|
|
|
103,000 |
|
Senior unsecured notes due from July 1, 2011
to July 2, 2013, weighted average fixed
interest rate of 5.14% at June 30, 2007 and
December 31, 2006 |
|
|
135,000 |
|
|
|
135,000 |
|
Senior unsecured notes due November 15,
2016, fixed interest rate of 6.20%,
comprised of $350,000,000 of principal
balance net of $907,000 and $957,000 of
unamortized debt discount at June 30, 2007
and December 31, 2006, respectively |
|
|
349,093 |
|
|
|
349,043 |
|
Senior unsecured notes due November 15,
2036, fixed interest rate of 6.85%,
comprised of $250,000,000 of principal
balance net of $1,384,000 and $1,407,000 of
unamortized debt discount at June 30, 2007
and December 31, 2006, respectively |
|
|
248,616 |
|
|
|
248,593 |
|
Senior notes due June 1, 2012, fixed rate of
9.75%, comprised of $250,000 of principal
balance and $17,000 and $19,000 of
unamortized debt premium at June 30, 2007
and December 31, 2006, respectively |
|
|
267 |
|
|
|
269 |
|
Variable Rate Demand Industrial Development
Revenue Bonds, Series 1989 A, due July 1,
2014, with interest payable quarterly;
variable interest rate of 3.69% and 3.80% at
June 30, 2007 and December 31, 2006,
respectively |
|
|
2,050 |
|
|
|
2,050 |
|
Variable Rate Demand Revenue Bonds, Series
1999, due March 1, 2009, with interest
payable quarterly; variable interest rate of
3.93% and 4.11% at June 30, 2007 and
December 31, 2006, respectively |
|
|
900 |
|
|
|
1,225 |
|
Industrial Development Revenue Bonds,
payable in annual installments of $715,000
on December 1st of each year,
fixed interest rate of 5.25% |
|
|
2,155 |
|
|
|
2,155 |
|
Revolving short-term $4,000,000 credit
facility for operations in China, variable
interest rate of 5.86% and 6.00% (based on
LIBOR plus 0.50%) at June 30, 2007 and
December 31, 2006, respectively |
|
|
2,475 |
|
|
|
1,017 |
|
|
|
|
|
|
|
|
Total |
|
|
1,275,556 |
|
|
|
1,105,352 |
|
Less amounts due within one year |
|
|
(33,840 |
) |
|
|
(22,257 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,241,716 |
|
|
$ |
1,083,095 |
|
|
|
|
|
|
|
|
On November 9, 2006, the Company amended and restated its syndicated credit agreement to allow
for increased borrowings of up to $1,100,000,000. This five-year, unsecured syndicated credit
facility, which replaced the $700,000,000 and $100,000,000 existing bank credit lines, has fifteen
banks as lenders and can be increased to $1,600,000,000 with their approval.
12
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company also has two separate revolving credit facilities for operations in Canada with a
combined credit limit of CDN$35,000,000. There were no borrowings outstanding on these credit
facilities at June 30, 2007 and December 31, 2006.
At June 30, 2007, the Company had $33,300,000 of letters of credit outstanding under the syndicated
credit facility with availability to issue an additional $91,700,000 of letters of credit. The
syndicated credit facility includes a commitment fee on the unused portion, at an annual rate of
0.125% at June 30, 2007.
On November 20, 2006, the Company entered into an Indenture (the Indenture), for the issuance of
$600,000,000 of unsecured debt securities which are guaranteed by all of the direct and indirect,
wholly-owned domestic subsidiaries of the Company and any entities that become such subsidiaries
during the term of the Indenture (collectively, the Subsidiary Guarantors). None of Reliances
foreign subsidiaries or its non-wholly-owned domestic subsidiaries is a guarantor. The total debt
issued was comprised of two tranches, (a) $350,000,000 aggregate principal amount of senior
unsecured notes bearing interest at the rate of 6.20% per annum, maturing on November 15, 2016 and
(b) $250,000,000 aggregate principal amount of senior unsecured notes bearing interest at the rate
of 6.85% per annum, maturing on November 15, 2036. The notes are senior unsecured obligations of
Reliance and rank equally with all other existing and future unsecured and unsubordinated debt
obligations of Reliance. Reliance, at its option, may redeem all or part of the notes of either
series at any time prior to their maturity by paying a redemption price equal to the greater of
100% of the aggregate principal amount of the notes to be redeemed or the sum of the present values
of the remaining scheduled payments (as defined in the Indenture), plus, in each case, accrued and
unpaid interest thereon to, but not including, the redemption date. The proceeds from the notes
were used to pay down outstanding borrowings on the $1,100,000,000 credit facility. In April 2007,
these notes were exchanged for publicly traded notes registered with the Securities and Exchange
Commission.
The Company also has $278,000,000 of outstanding senior unsecured notes issued in private
placements of debt. The outstanding senior notes bear interest at an average fixed rate of 6.0%
and have an average remaining life of 3.6 years, maturing from 2008 to 2013.
The $1,100,000,000 syndicated credit agreement and the senior unsecured note agreements require the
Company to maintain a minimum net worth and interest coverage ratio and a maximum leverage ratio,
and include a change of control provision, among other things.
8. Shareholders Equity
On May 17, 2006, Reliances Board of Directors declared a two-for-one stock split in the form of a
100% stock dividend on the Companys common stock. The common stock split was affected by issuing
one additional share of common stock for each share held by shareholders of record on July 5, 2006.
The additional shares were distributed on July 19, 2006. All share and per share data, including
prior period data as appropriate, have been adjusted to reflect this split.
Additionally, during the six months ended June 30, 2007, the Company issued 572,938 shares of
common stock in connection with the exercise of employee stock options for total proceeds of
approximately $10,796,000. Also, 6,244 shares of common stock valued at approximately $280,000 were
issued to division managers of the Company in March 2007 under the Key Man Incentive Plan for 2006.
The Company has not repurchased any shares of its common stock since 2000.
13
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
defines comprehensive income (loss) as non-stockholder changes in equity. Comprehensive income for
each of the three- and six-month periods ended June 30, 2007 and 2006, respectively, included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
122,784 |
|
|
$ |
100,505 |
|
|
$ |
234,480 |
|
|
$ |
172,360 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation income |
|
|
12,594 |
|
|
|
1,364 |
|
|
|
15,009 |
|
|
|
1,782 |
|
Minimum pension liability, net of tax |
|
|
|
|
|
|
574 |
|
|
|
|
|
|
|
574 |
|
Unrealized gain/(loss) on investments,
net of tax |
|
|
66 |
|
|
|
(41 |
) |
|
|
66 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
12,660 |
|
|
|
1,897 |
|
|
|
15,075 |
|
|
|
2,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
135,444 |
|
|
$ |
102,402 |
|
|
$ |
249,555 |
|
|
$ |
174,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income included the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Foreign currency translation adjustments |
|
$ |
17,730 |
|
|
$ |
2,721 |
|
Unrealized gain on investments, net of tax |
|
|
311 |
|
|
|
245 |
|
Minimum pension liability, net of tax |
|
|
(4,597 |
) |
|
|
(4,597 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
13,444 |
|
|
$ |
(1,631 |
) |
|
|
|
|
|
|
|
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 minimum
pension liability are net of taxes of ($192,000) and $2,836,000, respectively, as of June 30, 2007
and ($151,000) and $2,836,000, respectively, as of December 31, 2006.
9. Employee Benefits
Defined Benefit and Supplemental Executive Retirement Plans
The Company maintains a Supplemental Executive Retirement Plan (SERP), which is a nonqualified
pension plan that provides post-retirement and certain pre-retirement pension benefits to key
officers of the Company. Separate SERP plans exist for three of the Companys subsidiaries, each
of which provides post-retirement benefits to its respective key employees. Certain other deferred
compensation arrangements exist for key officers at some of our subsidiary companies.
The Company maintains, through various subsidiaries, defined benefit pension plans for certain of
its employees. These plans generally provide benefits of stated amounts for each year of service
or provide benefits based on the participants hourly wage rate and years of service.
14
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The net periodic pension costs for the SERP and defined benefit plans were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Plans |
|
|
Defined Benefit Plans |
|
Three Months Ended June 30, |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service Cost |
|
$ |
241 |
|
|
$ |
142 |
|
|
$ |
206 |
|
|
$ |
270 |
|
Interest Cost |
|
|
392 |
|
|
|
283 |
|
|
|
411 |
|
|
|
400 |
|
Expected return on assets |
|
|
|
|
|
|
|
|
|
|
(467 |
) |
|
|
(400 |
) |
Amortization of prior service cost |
|
|
49 |
|
|
|
49 |
|
|
|
5 |
|
|
|
37 |
|
Amortization of net loss |
|
|
313 |
|
|
|
133 |
|
|
|
4 |
|
|
|
113 |
|
Settlement expense |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
995 |
|
|
$ |
607 |
|
|
$ |
174 |
|
|
$ |
1,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Plans |
|
|
Defined Benefit Plans |
|
Six Months Ended June 30, |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service Cost |
|
$ |
481 |
|
|
$ |
283 |
|
|
$ |
412 |
|
|
$ |
367 |
|
Interest Cost |
|
|
784 |
|
|
|
558 |
|
|
|
822 |
|
|
|
521 |
|
Expected return on assets |
|
|
|
|
|
|
|
|
|
|
(935 |
) |
|
|
(515 |
) |
Amortization of prior service cost |
|
|
98 |
|
|
|
98 |
|
|
|
10 |
|
|
|
36 |
|
Amortization of net loss |
|
|
625 |
|
|
|
257 |
|
|
|
8 |
|
|
|
133 |
|
Settlement expense |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
1,988 |
|
|
$ |
1,196 |
|
|
$ |
332 |
|
|
$ |
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement Plan
In addition to the Companys defined benefit pension plans as noted above, EMJ sponsors a defined
benefit health care plan that provides post-retirement medical and dental benefits to eligible full
time employees and their dependents (the Post-retirement Plan). The Post-retirement Plan is fully
insured, with retirees paying a percentage of the annual premium. Such premiums are adjusted
annually based on age and length of service of active and retired participants. The Post-retirement
Plan contains other cost-sharing features such as deductibles and coinsurance. The Company
recognizes the cost of future benefits earned by participants during their working careers, as
determined using actuarial assumptions. Gains and losses realized from the remeasurement of the
plans benefit obligation are amortized to income over three years.
Components of the net periodic pension expense associated with the Companys Post-retirement
Plan are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June |
|
|
|
|
|
|
30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service Cost |
|
$ |
123 |
|
|
$ |
100 |
|
|
$ |
246 |
|
|
$ |
100 |
|
Interest Cost |
|
|
110 |
|
|
|
89 |
|
|
|
220 |
|
|
|
89 |
|
Expected return on assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss |
|
|
21 |
|
|
|
19 |
|
|
|
42 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
254 |
|
|
$ |
208 |
|
|
$ |
508 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contributions
The Company previously disclosed in its financial statements for the year ended December 31, 2006,
included in its Annual Report on Form 10-K, that it expected to contribute $1,515,000 to its
defined benefit plans in 2007. As of June 30, 2007, contributions of approximately $1,139,000 had
been made.
Share Based Compensation
On March 2, 2007, the Company granted 1,026,500 options to acquire its common stock to key
employees with an exercise price equal to the fair market value. The stock options vest ratably
over a period of four years and expire seven years after the date of grant. The fair value of stock
options granted was estimated using the Black-Scholes option-pricing model with the following
assumptions: Expected life 4.75 years; Volatility 39.6%; Dividend yield 0.7%; Risk-free
interest rate 4.5%; Grant date option fair value $17.11.
On May 16, 2007, the Company granted 42,000 options to acquire its common stock to the non-employee
members of the Board of Directors with an exercise price equal to the fair market value. The stock
options cliff vest after one year and expire ten years after the date of grant. The fair value of
stock options granted was estimated using the Black-Scholes option-pricing model with the following
assumptions: Expected life 5.5 years; Volatility 38.6%; Dividend yield 0.5%; Risk-free
interest rate 4.6%; Grant date option fair value $25.24
Supplemental Bonus Plan
In 2005, prior to Reliances acquisition, EMJ reached a settlement with the U.S. Department of
Labor regarding a change in its methodology for annual valuations of its stock while it was a
private company for the purpose of making contributions in stock to its retirement plan. This
resulted in a special additional contribution to the plan in shares of EMJ common stock. During
the six months ended June 30, 2007, EMJ paid out cash of $341,000 in lieu of 9,377 Reliance shares
to terminated employees. At June 30, 2007, the remaining obligation to contribute cash to a
phantom stock plan supplementing the EMJ Retirement Savings Plan consisted of the cash equivalent
of 160,655 shares of Reliance common stock. This obligation will be satisfied by future cash
contributions as allowed under the Internal Revenue Code and ERISA requirements.
16
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Earnings Per Share
The Company calculates basic and diluted earnings per share as required by SFAS No. 128, Earnings
Per Share. Basic earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share are calculated including the dilutive effects
of warrants, options, and convertible securities, if any.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
122,784 |
|
|
$ |
100,505 |
|
|
$ |
234,480 |
|
|
$ |
172,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
76,220 |
|
|
|
75,115 |
|
|
|
76,042 |
|
|
|
70,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
962 |
|
|
|
760 |
|
|
|
650 |
|
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for dilutive earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and
assumed conversions |
|
|
77,182 |
|
|
|
75,875 |
|
|
|
76,692 |
|
|
|
71,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations
diluted |
|
$ |
1.59 |
|
|
$ |
1.32 |
|
|
$ |
3.06 |
|
|
$ |
2.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations
basic |
|
$ |
1.61 |
|
|
$ |
1.34 |
|
|
$ |
3.08 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computations of earnings per share for the three and six months ended June 30, 2007 do not
include 42,000 and 1,062,500 shares reserved for issuance upon exercise of stock options,
respectively, because their inclusion would have been anti-dilutive. There were 42,000
anti-dilutive shares reserved for issuance upon exercise of stock options for the three and six
months ended June 30, 2006.
17
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Condensed Consolidating Financial Statements
In November 2006, the Company issued senior unsecured notes in the aggregate principal amount of
$600,000,000 at fixed interest rates that are guaranteed by its wholly-owned domestic subsidiaries.
The accompanying combined and consolidating financial information has been prepared and presented
pursuant to Rule 3-10 of SEC Regulation S-X Financial Statements of Guarantors and Issuers of
Guaranteed Securities Registered or Being Registered. The guarantees are full and unconditional
and joint and several obligations of each of the guarantor subsidiaries. There are no significant
restrictions on the ability of the Company to obtain funds from any of the guarantor subsidiaries
by dividends or loan. The supplemental consolidating financial information has been presented in
lieu of separate financial statements of the guarantors as such separate financial statements are
not considered meaningful. Certain prior year amounts have been adjusted to conform to current
year presentation.
Condensed Unaudited Consolidating Balance Sheet
As of June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Eliminations & |
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Reclassifications |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
(17,690 |
) |
|
$ |
74,145 |
|
|
$ |
18,495 |
|
|
$ |
|
|
|
$ |
74,950 |
|
Accounts receivable, less allowance for
doubtful accounts |
|
|
102,428 |
|
|
|
676,223 |
|
|
|
59,285 |
|
|
|
|
|
|
|
837,936 |
|
Inventories |
|
|
98,796 |
|
|
|
917,100 |
|
|
|
84,574 |
|
|
|
|
|
|
|
1,100,470 |
|
Intercompany receivables |
|
|
639 |
|
|
|
6,555 |
|
|
|
901 |
|
|
|
(8,095 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
371 |
|
|
|
20,678 |
|
|
|
1,108 |
|
|
|
|
|
|
|
22,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
184,544 |
|
|
|
1,694,701 |
|
|
|
164,363 |
|
|
|
(8,095 |
) |
|
|
2,035,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries |
|
|
2,570,151 |
|
|
|
36,828 |
|
|
|
|
|
|
|
(2,606,979 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
86,913 |
|
|
|
676,894 |
|
|
|
17,991 |
|
|
|
|
|
|
|
781,798 |
|
Goodwill |
|
|
15,328 |
|
|
|
804,069 |
|
|
|
98,679 |
|
|
|
|
|
|
|
918,076 |
|
Intangible assets, net |
|
|
6,176 |
|
|
|
376,644 |
|
|
|
16 |
|
|
|
|
|
|
|
382,836 |
|
Intercompany receivables |
|
|
61,415 |
|
|
|
1,570 |
|
|
|
|
|
|
|
(62,985 |
) |
|
|
|
|
Other assets |
|
|
55 |
|
|
|
56,233 |
|
|
|
2,069 |
|
|
|
|
|
|
|
58,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,924,582 |
|
|
$ |
3,646,939 |
|
|
$ |
283,118 |
|
|
$ |
(2,678,059 |
) |
|
$ |
4,176,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
48,644 |
|
|
$ |
385,353 |
|
|
$ |
30,048 |
|
|
$ |
(8,095 |
) |
|
$ |
455,950 |
|
Accrued compensation and retirement costs |
|
|
4,440 |
|
|
|
71,735 |
|
|
|
4,107 |
|
|
|
|
|
|
|
80,282 |
|
Other current liabilities |
|
|
14,420 |
|
|
|
80,757 |
|
|
|
14,788 |
|
|
|
|
|
|
|
109,965 |
|
Current maturities of long-term debt |
|
|
30,200 |
|
|
|
1,165 |
|
|
|
2,475 |
|
|
|
|
|
|
|
33,840 |
|
Current maturities of capital lease obligations |
|
|
|
|
|
|
571 |
|
|
|
53 |
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
97,704 |
|
|
|
539,581 |
|
|
|
51,471 |
|
|
|
(8,095 |
) |
|
|
680,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
847,558 |
|
|
|
394,158 |
|
|
|
|
|
|
|
|
|
|
|
1,241,716 |
|
Intercompany borrowings |
|
|
|
|
|
|
|
|
|
|
62,985 |
|
|
|
(62,985 |
) |
|
|
|
|
Deferred taxes and other long-term liabilities |
|
|
|
|
|
|
246,808 |
|
|
|
1,930 |
|
|
|
|
|
|
|
248,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,979,320 |
|
|
|
2,466,392 |
|
|
|
166,732 |
|
|
|
(2,606,979 |
) |
|
|
2,005,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,924,582 |
|
|
$ |
3,646,939 |
|
|
$ |
283,118 |
|
|
$ |
(2,678,059 |
) |
|
$ |
4,176,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet
As of December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Eliminations & |
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Reclassifications |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
(8,721 |
) |
|
$ |
56,466 |
|
|
$ |
9,730 |
|
|
$ |
|
|
|
$ |
57,475 |
|
Accounts receivable, less allowance for
doubtful accounts |
|
|
87,570 |
|
|
|
545,931 |
|
|
|
32,585 |
|
|
|
187 |
|
|
|
666,273 |
|
Inventories |
|
|
79,901 |
|
|
|
785,855 |
|
|
|
38,562 |
|
|
|
|
|
|
|
904,318 |
|
Intercompany receivables |
|
|
655 |
|
|
|
2,781 |
|
|
|
338 |
|
|
|
(3,774 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
46,504 |
|
|
|
1,006 |
|
|
|
(187 |
) |
|
|
47,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
159,405 |
|
|
|
1,437,537 |
|
|
|
82,221 |
|
|
|
(3,774 |
) |
|
|
1,675,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries |
|
|
2,308,683 |
|
|
|
31,021 |
|
|
|
|
|
|
|
(2,339,704 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
87,365 |
|
|
|
640,014 |
|
|
|
15,293 |
|
|
|
|
|
|
|
742,672 |
|
Goodwill |
|
|
15,328 |
|
|
|
766,839 |
|
|
|
2,704 |
|
|
|
|
|
|
|
784,871 |
|
Intangible assets, net |
|
|
5,591 |
|
|
|
348,581 |
|
|
|
23 |
|
|
|
|
|
|
|
354,195 |
|
Intercompany receivables |
|
|
109,477 |
|
|
|
|
|
|
|
|
|
|
|
(109,477 |
) |
|
|
|
|
Other assets |
|
|
526 |
|
|
|
56,062 |
|
|
|
922 |
|
|
|
(464 |
) |
|
|
57,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,686,375 |
|
|
$ |
3,280,054 |
|
|
$ |
101,163 |
|
|
$ |
(2,453,419 |
) |
|
$ |
3,614,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
30,885 |
|
|
$ |
291,204 |
|
|
$ |
22,041 |
|
|
$ |
(3,774 |
) |
|
$ |
340,356 |
|
Accrued compensation and retirement costs |
|
|
10,199 |
|
|
|
78,960 |
|
|
|
3,746 |
|
|
|
|
|
|
|
92,905 |
|
Other current liabilities |
|
|
7,598 |
|
|
|
84,292 |
|
|
|
2,772 |
|
|
|
|
|
|
|
94,662 |
|
Current maturities of long-term debt |
|
|
20,200 |
|
|
|
1,040 |
|
|
|
1,017 |
|
|
|
|
|
|
|
22,257 |
|
Current maturities of capital lease obligations |
|
|
|
|
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
68,882 |
|
|
|
456,055 |
|
|
|
29,576 |
|
|
|
(3,774 |
) |
|
|
550,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
877,487 |
|
|
|
205,608 |
|
|
|
|
|
|
|
|
|
|
|
1,083,095 |
|
Intercompany borrowings |
|
|
|
|
|
|
88,154 |
|
|
|
20,404 |
|
|
|
(108,558 |
) |
|
|
|
|
Deferred taxes and other long-term liabilities |
|
|
|
|
|
|
232,330 |
|
|
|
1,611 |
|
|
|
|
|
|
|
233,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,740,006 |
|
|
|
2,297,907 |
|
|
|
49,572 |
|
|
|
(2,341,087 |
) |
|
|
1,746,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,686,375 |
|
|
$ |
3,280,054 |
|
|
$ |
101,163 |
|
|
$ |
(2,453,419 |
) |
|
$ |
3,614,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Unaudited Consolidating Statement of Income
For the three months ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
247,938 |
|
|
$ |
1,567,579 |
|
|
$ |
97,225 |
|
|
$ |
(16,706 |
) |
|
$ |
1,896,036 |
|
Other income, net |
|
|
120 |
|
|
|
29,304 |
|
|
|
2,643 |
|
|
|
(29,734 |
) |
|
|
2,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248,058 |
|
|
|
1,596,883 |
|
|
|
99,868 |
|
|
|
(46,440 |
) |
|
|
1,898,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation
and amortization shown below) |
|
|
184,383 |
|
|
|
1,157,571 |
|
|
|
73,312 |
|
|
|
(16,727 |
) |
|
|
1,398,539 |
|
Warehouse, delivery, selling, general and
administrative |
|
|
56,618 |
|
|
|
212,526 |
|
|
|
16,960 |
|
|
|
(21,555 |
) |
|
|
264,549 |
|
Depreciation and amortization |
|
|
2,067 |
|
|
|
16,700 |
|
|
|
443 |
|
|
|
|
|
|
|
19,210 |
|
Interest |
|
|
15,153 |
|
|
|
11,679 |
|
|
|
941 |
|
|
|
(8,158 |
) |
|
|
19,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258,221 |
|
|
|
1,398,476 |
|
|
|
91,656 |
|
|
|
(46,440 |
) |
|
|
1,701,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in earnings
of subsidiaries and income taxes |
|
|
(10,163 |
) |
|
|
198,407 |
|
|
|
8,212 |
|
|
|
|
|
|
|
196,456 |
|
Equity in earnings of subsidiaries |
|
|
139,910 |
|
|
|
923 |
|
|
|
|
|
|
|
(140,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
129,747 |
|
|
|
199,330 |
|
|
|
8,212 |
|
|
|
(140,833 |
) |
|
|
196,456 |
|
Provision for income taxes |
|
|
6,963 |
|
|
|
63,587 |
|
|
|
3,122 |
|
|
|
|
|
|
|
73,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
122,784 |
|
|
$ |
135,743 |
|
|
$ |
5,090 |
|
|
$ |
(140,833 |
) |
|
$ |
122,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Unaudited Consolidating Statement of Income
For the three months ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
221,834 |
|
|
$ |
1,284,874 |
|
|
$ |
63,267 |
|
|
$ |
(10,753 |
) |
|
$ |
1,559,222 |
|
Other income, net |
|
|
66 |
|
|
|
24,700 |
|
|
|
532 |
|
|
|
(24,922 |
) |
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,900 |
|
|
|
1,309,574 |
|
|
|
63,799 |
|
|
|
(35,675 |
) |
|
|
1,559,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation
and amortization shown below) |
|
|
160,226 |
|
|
|
941,756 |
|
|
|
48,140 |
|
|
|
(10,773 |
) |
|
|
1,139,349 |
|
Warehouse, delivery, selling, general and
administrative |
|
|
56,531 |
|
|
|
180,977 |
|
|
|
10,318 |
|
|
|
(22,474 |
) |
|
|
225,352 |
|
Depreciation and amortization |
|
|
1,809 |
|
|
|
14,716 |
|
|
|
275 |
|
|
|
|
|
|
|
16,800 |
|
Interest |
|
|
6,094 |
|
|
|
13,052 |
|
|
|
215 |
|
|
|
(2,428 |
) |
|
|
16,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,660 |
|
|
|
1,150,501 |
|
|
|
58,948 |
|
|
|
(35,675 |
) |
|
|
1,398,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in earnings
of subsidiaries and income taxes |
|
|
(2,760 |
) |
|
|
159,073 |
|
|
|
4,851 |
|
|
|
|
|
|
|
161,164 |
|
Equity in earnings of subsidiaries |
|
|
114,250 |
|
|
|
2,039 |
|
|
|
|
|
|
|
(116,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
111,490 |
|
|
|
161,112 |
|
|
|
4,851 |
|
|
|
(116,289 |
) |
|
|
161,164 |
|
Provision for income taxes |
|
|
10,985 |
|
|
|
47,650 |
|
|
|
2,024 |
|
|
|
|
|
|
|
60,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
100,505 |
|
|
$ |
113,462 |
|
|
$ |
2,827 |
|
|
$ |
(116,289 |
) |
|
$ |
100,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Unaudited Consolidating Statement of Income
For the six months ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
486,065 |
|
|
$ |
3,099,846 |
|
|
$ |
181,739 |
|
|
$ |
(29,724 |
) |
|
$ |
3,737,926 |
|
Other income, net |
|
|
231 |
|
|
|
58,413 |
|
|
|
2,731 |
|
|
|
(58,668 |
) |
|
|
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,296 |
|
|
|
3,158,259 |
|
|
|
184,470 |
|
|
|
(88,392 |
) |
|
|
3,740,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation
and amortization shown below) |
|
|
362,423 |
|
|
|
2,297,569 |
|
|
|
137,751 |
|
|
|
(29,766 |
) |
|
|
2,767,977 |
|
Warehouse, delivery, selling, general and
administrative |
|
|
112,560 |
|
|
|
418,935 |
|
|
|
30,297 |
|
|
|
(41,691 |
) |
|
|
520,101 |
|
Depreciation and amortization |
|
|
4,238 |
|
|
|
32,604 |
|
|
|
819 |
|
|
|
|
|
|
|
37,661 |
|
Interest |
|
|
30,760 |
|
|
|
24,397 |
|
|
|
1,503 |
|
|
|
(16,935 |
) |
|
|
39,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,981 |
|
|
|
2,773,505 |
|
|
|
170,370 |
|
|
|
(88,392 |
) |
|
|
3,365,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in earnings
of subsidiaries and income taxes |
|
|
(23,685 |
) |
|
|
384,754 |
|
|
|
14,100 |
|
|
|
|
|
|
|
375,169 |
|
Equity in earnings of subsidiaries |
|
|
266,990 |
|
|
|
1,837 |
|
|
|
|
|
|
|
(268,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
243,305 |
|
|
|
386,591 |
|
|
|
14,100 |
|
|
|
(268,827 |
) |
|
|
375,169 |
|
Provision for income taxes |
|
|
8,825 |
|
|
|
127,591 |
|
|
|
4,273 |
|
|
|
|
|
|
|
140,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
234,480 |
|
|
$ |
259,000 |
|
|
$ |
9,827 |
|
|
$ |
(268,827 |
) |
|
$ |
234,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Unaudited Consolidating Statement of Income
For the six months ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Net sales |
|
$ |
425,188 |
|
|
$ |
2,053,515 |
|
|
$ |
86,837 |
|
|
$ |
(18,332 |
) |
|
$ |
2,547,208 |
|
Other income, net |
|
|
743 |
|
|
|
46,793 |
|
|
|
428 |
|
|
|
(46,310 |
) |
|
|
1,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425,931 |
|
|
|
2,100,308 |
|
|
|
87,265 |
|
|
|
(64,642 |
) |
|
|
2,548,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation
and amortization shown below) |
|
|
307,112 |
|
|
|
1,502,923 |
|
|
|
65,490 |
|
|
|
(18,375 |
) |
|
|
1,857,150 |
|
Warehouse, delivery, selling, general and
administrative |
|
|
107,804 |
|
|
|
282,444 |
|
|
|
14,169 |
|
|
|
(41,970 |
) |
|
|
362,447 |
|
Depreciation and amortization |
|
|
3,582 |
|
|
|
24,663 |
|
|
|
376 |
|
|
|
|
|
|
|
28,621 |
|
Interest |
|
|
12,088 |
|
|
|
14,544 |
|
|
|
307 |
|
|
|
(4,297 |
) |
|
|
22,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,586 |
|
|
|
1,824,574 |
|
|
|
80,342 |
|
|
|
(64,642 |
) |
|
|
2,270,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in earnings
of subsidiaries and income taxes |
|
|
(4,655 |
) |
|
|
275,734 |
|
|
|
6,923 |
|
|
|
|
|
|
|
278,002 |
|
Equity in earnings of subsidiaries |
|
|
193,874 |
|
|
|
2,675 |
|
|
|
|
|
|
|
(196,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
189,219 |
|
|
|
278,409 |
|
|
|
6,923 |
|
|
|
(196,549 |
) |
|
|
278,002 |
|
Provision for income taxes |
|
|
16,859 |
|
|
|
85,848 |
|
|
|
2,935 |
|
|
|
|
|
|
|
105,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
172,360 |
|
|
$ |
192,561 |
|
|
$ |
3,988 |
|
|
$ |
(196,549 |
) |
|
$ |
172,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Unaudited Consolidating Cash Flow Statement
For the six months ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
234,480 |
|
|
$ |
259,000 |
|
|
$ |
9,827 |
|
|
$ |
(268,827 |
) |
|
$ |
234,480 |
|
Equity in earnings of subsidiaries |
|
|
(266,990 |
) |
|
|
(1,837 |
) |
|
|
|
|
|
|
268,827 |
|
|
|
|
|
Adjustments to reconcile net income to cash
provided by (used in) operating activities |
|
|
(6,003 |
) |
|
|
(55,233 |
) |
|
|
(3,005 |
) |
|
|
|
|
|
|
(64,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
(38,513 |
) |
|
|
201,930 |
|
|
|
6,822 |
|
|
|
|
|
|
|
170,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,462 |
) |
|
|
(53,952 |
) |
|
|
(1,231 |
) |
|
|
|
|
|
|
(58,645 |
) |
Acquisitions of metals service centers and
net asset purchases of metals service
centers, net of cash acquired |
|
|
|
|
|
|
(217,712 |
) |
|
|
|
|
|
|
|
|
|
|
(217,712 |
) |
Net advances from subsidiaries |
|
|
48,062 |
|
|
|
|
|
|
|
|
|
|
|
(48,062 |
) |
|
|
|
|
Other investing activities, net |
|
|
112 |
|
|
|
2,139 |
|
|
|
59 |
|
|
|
|
|
|
|
2,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
44,712 |
|
|
|
(269,525 |
) |
|
|
(1,172 |
) |
|
|
(48,062 |
) |
|
|
(274,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) of long-term
debt |
|
|
(20,000 |
) |
|
|
175,916 |
|
|
|
(39,667 |
) |
|
|
|
|
|
|
116,249 |
|
Dividends paid |
|
|
(12,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,174 |
) |
Intercompany borrowings (repayments) |
|
|
|
|
|
|
(90,642 |
) |
|
|
42,580 |
|
|
|
48,062 |
|
|
|
|
|
Other financing activities |
|
|
17,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing
activities |
|
|
(15,168 |
) |
|
|
85,274 |
|
|
|
2,913 |
|
|
|
48,062 |
|
|
|
121,081 |
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
(8,969 |
) |
|
|
17,679 |
|
|
|
8,765 |
|
|
|
|
|
|
|
17,475 |
|
Cash and cash equivalents at beginning of
period |
|
|
(8,721 |
) |
|
|
56,466 |
|
|
|
9,730 |
|
|
|
|
|
|
|
57,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
(17,690 |
) |
|
$ |
74,145 |
|
|
$ |
18,495 |
|
|
$ |
|
|
|
$ |
74,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Unaudited Consolidating Cash Flow Statement
For the six months ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
172,360 |
|
|
$ |
192,561 |
|
|
$ |
3,988 |
|
|
$ |
(196,549 |
) |
|
$ |
172,360 |
|
Equity in earnings of subsidiaries |
|
|
(193,874 |
) |
|
|
(2,675 |
) |
|
|
|
|
|
|
196,549 |
|
|
|
|
|
Adjustments to reconcile net income to cash
provided by (used in) operating activities |
|
|
(36,790 |
) |
|
|
(221,119 |
) |
|
|
8,382 |
|
|
|
|
|
|
|
(249,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
|
(58,304 |
) |
|
|
(31,233 |
) |
|
|
12,370 |
|
|
|
|
|
|
|
(77,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(16,813 |
) |
|
|
(40,852 |
) |
|
|
(2,029 |
) |
|
|
|
|
|
|
(59,694 |
) |
Acquisitions of metals service centers and
net asset purchases of metals service
centers, net of cash acquired |
|
|
(323,245 |
) |
|
|
(20,679 |
) |
|
|
|
|
|
|
|
|
|
|
(343,924 |
) |
Net advances from subsidiaries |
|
|
419,780 |
|
|
|
|
|
|
|
|
|
|
|
(419,780 |
) |
|
|
|
|
Other investing activities, net |
|
|
808 |
|
|
|
1,201 |
|
|
|
|
|
|
|
|
|
|
|
2,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities |
|
|
80,530 |
|
|
|
(60,330 |
) |
|
|
(2,029 |
) |
|
|
(419,780 |
) |
|
|
(401,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) of long-term
debt |
|
|
(25,000 |
) |
|
|
481,409 |
|
|
|
1,316 |
|
|
|
|
|
|
|
457,725 |
|
Dividends paid |
|
|
(7,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,081 |
) |
Intercompany borrowings (repayments) |
|
|
|
|
|
|
(414,621 |
) |
|
|
(5,159 |
) |
|
|
419,780 |
|
|
|
|
|
Other financing activities |
|
|
3,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing
activities |
|
|
(29,033 |
) |
|
|
66,788 |
|
|
|
(3,843 |
) |
|
|
419,780 |
|
|
|
453,692 |
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
(6,807 |
) |
|
|
(24,775 |
) |
|
|
6,664 |
|
|
|
|
|
|
|
(24,918 |
) |
Cash and cash equivalents at beginning of
period |
|
|
(7,912 |
) |
|
|
35,717 |
|
|
|
7,217 |
|
|
|
|
|
|
|
35,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
(14,719 |
) |
|
$ |
10,942 |
|
|
$ |
13,881 |
|
|
$ |
|
|
|
$ |
10,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Subsequent Event
The Company acquired all of the outstanding capital stock of Clayton Metals, Inc. (Clayton
Metals), an Illinois corporation headquartered in Wood Dale, Illinois, effective July 1, 2007.
Clayton Metals, founded in 1976, specializes primarily in the processing and distribution of
aluminum, stainless steel and red metal flat-rolled products, custom extrusions and aluminum
circles through its metals service center locations in Wood Dale, Illinois; Cerritos, California;
High Point, North Carolina; and Parsippany, New Jersey. Clayton Metals net sales for the twelve
months ended December 31, 2006 were approximately $123,000,000. The Company acquired Clayton Metals
through RSAC Management Corp., the Companys wholly-owned subsidiary. The all cash purchase price
was funded with borrowings on the Companys syndicated credit facility.
23
RELIANCE STEEL & ALUMINUM CO.
Item 2. Managements Discussion And Analysis of Financial Condition And Results of Operations
The following table sets forth certain income statement data for the three- and six-month periods
ended June 30, 2007 and 2006 (dollars are shown in thousands and certain amounts may not calculate
due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
$ |
|
|
Net Sales |
|
|
$ |
|
|
Net Sales |
|
|
$ |
|
|
Net Sales |
|
|
$ |
|
|
Net Sales |
|
Net sales |
|
$ |
1,896,036 |
|
|
|
100.0 |
% |
|
$ |
1,559,222 |
|
|
|
100.0 |
% |
|
$ |
3,737,926 |
|
|
|
100.0 |
% |
|
$ |
2,547,208 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
497,497 |
|
|
|
26.2 |
|
|
|
419,873 |
|
|
|
26.9 |
|
|
|
969,949 |
|
|
|
25.9 |
|
|
|
690,058 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S,G&A expenses |
|
|
264,549 |
|
|
|
14.0 |
|
|
|
225,352 |
|
|
|
14.5 |
|
|
|
520,101 |
|
|
|
13.9 |
|
|
|
362,447 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
16,451 |
|
|
|
0.9 |
|
|
|
14,613 |
|
|
|
0.9 |
|
|
|
32,598 |
|
|
|
0.9 |
|
|
|
25,636 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit(1) |
|
$ |
216,497 |
|
|
|
11.4 |
% |
|
$ |
179,908 |
|
|
|
11.5 |
% |
|
$ |
417,250 |
|
|
|
11.2 |
% |
|
$ |
301,975 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes other income, amortization expense, interest expense, and
income tax expense. |
2007 Acquisitions
Acquisition of Crest Steel Corporation
On January 2, 2007, the Company purchased all of the outstanding capital stock of Crest Steel
Corporation (Crest), a metals service center company headquartered in Carson, California with
facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes
in the processing and distribution of carbon steel products including flat-rolled, plate, bars and
structurals. Crests net sales for the year ended December 31, 2006 were approximately $133
million.
Acquisition of Industrial Metals and Surplus, Inc.
Also, on January 2, 2007, the Companys wholly-owned subsidiary, Siskin Steel & Supply Company,
Inc., purchased the outstanding capital stock of Industrial Metals and Surplus, Inc. (Industrial
Metals), a metals service center company headquartered in Atlanta, Georgia and a related company,
Athens Steel, Inc., located in Athens, Georgia. Industrial Metals was founded in 1978 and
specializes in the processing and distribution of carbon steel structurals, flat-rolled and
ornamental iron products. Siskins Georgia Steel Supply Company division located in Atlanta will
be combined with the Industrial Metals operations. Net sales for Industrial Metals (including
Athens Steel) for the year ended December 31, 2006 were approximately $105 million.
Acquisition of Encore Group
As of February 1, 2007, the Company acquired the net assets and business of the Encore Group of
metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team
Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in
connection with the buyout by management and a private equity fund managed by HSBC Capital (Canada)
Inc. of certain former Corus CIC and Corus America businesses. Encore specializes in the processing
and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar
and carbon steel flat-rolled products, through its 17 facilities located mainly in Western Canada.
Encore Groups net sales for the year ended December 31, 2006 were approximately CDN$259 million.
24
The total cost of the acquisitions of Crest, Industrial Metals, and Encore Group of approximately
$217.7 million was funded with borrowings on the Companys syndicated credit facility. Total debt
assumed, net of cash, in connection with
these acquisitions was approximately $51.5 million. The consolidated financial statements reflect
the allocations of each acquisitions purchase price, which is preliminary as of June 30, 2007 for
Encore Group and Industrial Metals.
2006 Acquisitions
Acquisition of Yarde Metals, Inc.
On August 1, 2006 we acquired Yarde Metals, Inc. (Yarde Metals), a metals service center company
headquartered in Southington, Connecticut. We paid $100 million in cash and assumed approximately
$101 million of net debt for all of the outstanding common stock of Yarde Metals. Yarde Metals was
founded in 1976 and specializes in the processing and distribution of stainless steel and aluminum
plate, rod and bar products. Yarde Metals has additional metals service centers in Pelham, New
Hampshire; East Hanover, New Jersey; Hauppauge, New York; High Point, North Carolina; Streetsboro,
Ohio; and Limerick, Pennsylvania and a sales office in Ft. Lauderdale, Florida. Yardes net sales
for the five months ended December 31, 2006 were approximately $182 million.
Acquisition of Earle M. Jorgensen Company
On April 3, 2006 we acquired Earle M. Jorgensen Company (EMJ), which was our first acquisition of
a public company. EMJ, headquartered in Lynwood, California, is one of the largest distributors of
metal products in North America with 40 service center facilities. The transaction was valued at
approximately $984 million, including the assumption of EMJs net debt. We paid $6.50 in cash and
issued 0.1784 of a share of Reliance common stock for each share of EMJ common stock outstanding.
This also was the first acquisition where we used our stock as consideration. EMJs net sales for
the nine months ended December 31, 2006 were approximately $1.45 billion.
Acquisition of Flat Rock Metal Processing L.L.C.
On March 27, 2006, through Precision Strip, Inc. (Precision Strip), a wholly-owned subsidiary, we
completed the acquisition of certain assets and business of Flat Rock Metal Processing, L.L.C.
(Flat Rock). The Flat Rock toll processing business in Perrysburg, Ohio and Portage, Indiana are
operated by Precision Strip.
Acquisition of Everest Metals (Suzhou) Co., Ltd.
In October 2005, we formed Reliance Pan Pacific Pte., Ltd. (RPP) with our joint venture partner
Manufacturing Network Pte. Ltd. (MNPL). We own 70% of RPP and MNPL owns the remaining 30%. On
March 1, 2006, RPP acquired 100% of the outstanding equity interest in Everest Metals (Suzhou) Co.,
Ltd. (Everest Metals), a metals service center company near Shanghai, Peoples Republic of China,
from MNPL. Everest Metals was formed in 2001 and began processing and distributing primarily
aluminum products to the electronics industry in 2002. Everests net sales for the ten months
ended December 31, 2006 were approximately $6 million.
Acquisition of the minority interest in American Steel, L.L.C.
In January 2006, we purchased the remaining 49.5% of American Steel, L.L.C. (American Steel),
from American Industries, Inc., the holder of the minority interest. As a result, effective
January 3, 2006, we include 100% of American Steels income in our financial results.
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
In the three months ended June 30, 2007, our consolidated net sales increased 22% to $1.90 billion,
compared to $1.56 billion for the three months ended June 30, 2006. This includes an 8.3% increase
in our tons sold and a 12.9% increase in our average selling price per ton sold (the tons sold and
average selling price per ton sold exclude the amounts related to Precision Strip, a toll
processing business). Our 2006 and 2007 acquisitions were the primary factor in our increase in
tons.
25
Same-store sales, which exclude the sales of our 2006 and 2007 acquisitions, were $1.12 billion in
the 2007 second
quarter, up 5.4% from the 2006 second quarter, with a 4.7% decrease in our tons sold and an 11.1%
increase in our average selling price per ton sold. The decrease in tons sold was due
to a slight reduction in demand in many end markets that we serve compared to the 2006 second
quarter when demand was very strong. Our average selling price per ton sold increased mainly
because of significant cost increases for stainless products since the 2006 period and cost
increases for carbon steel products in the 2007 second quarter.
Our 2007 second quarter gross profit was a record $497.5 million compared to $419.9 million in the
2006 second quarter. Our gross profit as a percentage of sales in the 2007 second quarter was
26.2% compared to 26.9% in the 2006 second quarter. Our gross profit margin was lower than the
2006 second quarter mainly because of competitive pressures in the market resulting from high
inventory levels in the service center industry. We also saw generally lower margins for our
aerospace products due to increased supply availability as compared to the 2006 second quarter when
supply was extremely tight, resulting in extremely strong gross profit margins.
In the 2007 second quarter, LIFO expense was $13.75 million, or $.11 earnings per diluted share,
mainly because of continued cost increases for stainless steel products. In the 2006 second
quarter we recorded LIFO expense of $18.0 million, or $.15 earnings per diluted share. LIFO
expense is included in our cost of sales.
Our 2007 second quarter warehouse, delivery, selling, general and administrative (S,G,&A)
expenses were 14.0% as a percentage of sales, slightly down from 14.5% during the 2006 second
quarter due to increased selling prices in the 2007 second quarter as well as our continued efforts
on cost control. Our increase in expense dollars of $39.2 million was mainly due to our 2006 and
2007 acquisitions, along with general cost increases.
Depreciation expense in the 2007 second quarter was $16.5 million compared to $14.6 million in the
2006 second quarter. The increase was mostly due to the additional depreciation expense from our
2006 and 2007 acquisitions and depreciation on new assets placed in service during the second half
of 2006 and throughout 2007.
Operating profit in the 2007 second quarter was $216.5 million, or 11.4%, compared to $179.9
million, or 11.5%, in the 2006 second quarter. Our operating profit dollars increased mainly
because of our acquisitions.
Interest expense for the 2007 second quarter increased $2.7 million, or 15.8%, due to additional
borrowings made to fund our 2006 and 2007 acquisitions.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Our 2007 six-month consolidated sales of $3.74 billion were up 46.7% from the 2006 six-month
period. This includes a 25.8% increase in tons sold and a 17.7% increase in our average selling
price per ton sold. Our 2006 and 2007 acquisitions contributed to our increased sales in the 2007
six-month period. Our 2006 and 2007 acquisitions, especially EMJ and Yarde Metals, also
contributed to the increase in our average selling price per ton sold as our product mix shifted to
higher percentages of aluminum, alloy and stainless steel products. Same-store sales were $2.2
billion in the 2007 six-month period, up 7.7% from the 2006 six-month period, with a 2.0% decrease
in our tons sold and a 10.5% increase in our average selling price per ton sold. The continued
increases in stainless steel prices also contributed to the increase in our average selling price
per ton sold.
Total gross profit increased 40.5% to $969.9 million for the 2007 six-month period compared to
$690.1 million in the 2006 six-month period. This increase is mainly due to the additional gross
profit from our 2006 and 2007 acquisitions. Gross profit as a percentage of sales in the 2007
six-month period was 25.9%, compared to 27.1% in the 2006 six-month period. The decline is mainly
due to the competitive pressures discussed above.
Also, in the 2007 six-month period we recorded LIFO expense of $32.5 million, or $.26 earnings per
diluted share, up from our 2006 six-month LIFO expense of $23.0 million, or $.20 earnings per
diluted share. The higher expense in 2007 is mainly due to increased costs for stainless steel
products in 2007 as compared to 2006 levels. We have reduced our full year LIFO expense estimate to
$65 million from $75 million, mainly due to recent price declines for stainless steel products.
26
In the 2007 six-month period our S,G&A expenses increased $157.7 million or 43.5% compared to 2006,
due mainly to the additional expenses of the companies that we acquired in 2006 and 2007. Our
expenses as a percent of sales in the 2007 six-month period were 13.9% compared to 14.2% in the
2006 period. The slight improvement as a percent of sales is mainly due to our increased selling
prices in 2007 and our effective expense control.
Depreciation expense for the 2007 six-month period was $32.6 million compared to $25.6 million in
the 2006 six-month period. The increase was mostly due to the additional depreciation expense from
our 2006 and 2007 acquisitions, along with depreciation on new assets placed in service throughout
2006 and the first half of 2007. Amortization expense increased $2.1 million in the 2007 six-month
period primarily due to the additional amortization expense from our 2006 and 2007 acquisitions.
Our 2007 six-month operating profit was $417.3 million, resulting in an operating profit margin of
11.2%, compared to $302.0 million, or an 11.9% operating profit margin in the same period of 2006.
Our operating profit dollars increased because of our acquisitions. However, our operating profit
margin declined mainly due to the somewhat lower gross profit margins in 2007.
Interest expense for the 2007 six-month period increased $17.1 million or 75.4% due to additional
borrowings made to fund our 2006 and 2007 acquisitions.
Our 2007 six-month period effective income tax rate was 37.5% compared to 38.0% in the same
six-month period in 2006. The decrease in 2007 is mainly due to our increased international
exposure and tax benefits from certain of our 2006 and 2007 acquisitions.
Liquidity and Capital Resources
At June 30, 2007, our working capital was $1.35 billion, up from $1.12 billion at December 31,
2006. The overall increase was primarily from the additional working capital of our 2007
acquisitions. Excluding the initial effect of acquisitions, the increase in working capital is
mainly due to an increase in our accounts receivable of $114.8 million and an increase in our
inventory of $95.0 million. This was offset by an increase in accounts payable and accrued expenses
of $84.1 million.
To manage our working capital, we focus on our days sales outstanding to monitor accounts
receivable and on our inventory turnover rate to monitor our inventory levels, as receivables and
inventory are our two most significant elements of working capital. As of June 30, 2007, our days
sales outstanding were approximately 40 days, a slight improvement from our 2006 year-end rate of
41 days. (We calculate our days sales outstanding as an average of the most recent two-month
period.) Our inventory turn rate during the 2007 six-month period was about 4.4 times (or 2.7
months on hand), consistent with our year end 2006 rate. Our 2006 and 2007 inventory turn rates
were negatively impacted by our acquisitions of EMJ and Yarde Metals because they carry many
products that do not typically turn at rates as high as many of our other products. We are
focusing on improving our inventory turn rate from current levels. As demand and pricing for our
products increase or decrease, our working capital needs increase or decrease, respectively. We
expect to finance increases in our working capital needs through operating cash flow or with
borrowings on our syndicated credit facility.
Our primary sources of liquidity are generally from internally generated funds from operations and
our revolving line of credit. Cash flow provided by operations was $170.2 million in the six
months ended June 30, 2007 compared to cash used in operations of $77.2 million in the six months
ended June 30, 2006. In 2006 our working capital needs were increasing due to both increased
demand and pricing. In 2007 our working capital needs have been more stable which contributed to
our strong cash flows along with our increased earnings in the 2007 six-month period.
Our outstanding debt (including capital lease obligations) at June 30, 2007 was $1.3 billion, up
from $1.1 billion at December 31, 2006, mainly due to the financing of our 2007 acquisitions. At
June 30, 2007, we had $392 million borrowed on our $1.1 billion revolving line of credit, which
includes $20 million to pay off private placement notes that matured in 2007. Our net
debt-to-total capital ratio was 37.6% at June 30, 2007; consistent with our 2006 year-end rate (net
debt-to-total capital is calculated as total debt, net of cash, divided by shareholders equity
plus total debt, net of cash). On January 2, 2007 we funded our acquisitions of Crest and
Industrial Metals with borrowings on our credit
facility. On February 1, 2007, we borrowed additional funds under our credit facility for the
purchase of the net assets and business of the Encore Group.
27
In the 2007 six months we used our borrowings and operating cash flow to fund our increased working
capital needs, capital expenditures of approximately $58.6 million and acquisitions of
approximately $217.7 million. Our June 30, 2007 financial statements include preliminary purchase
price allocations for our 2007 acquisitions of Encore Group and IMS.
At June 30, 2007, we also had $278 million of outstanding senior unsecured notes issued in private
placements of debt and $600 million of outstanding senior unsecured notes.
The $278 million of outstanding private placement notes bear interest at an average fixed rate of
6.0% and have an average remaining life of 3.6 years, maturing from 2008 to 2013.
The $600 million unsecured debt securities are comprised of two tranches, (a) $350 million
aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per
annum, maturing on November 15, 2016 and (b) $250 million aggregate principal amount of senior
unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036. In
April 2007, these notes were exchanged for publicly traded notes registered with the Securities and
Exchange Commission.
We also have two separate revolving credit facilities for operations in Canada with a combined
credit limit of CDN$35 million. There were no borrowings outstanding on these credit facilities at
June 30, 2007 and December 31, 2006.
Our $1.1 billion syndicated credit facility and our senior unsecured notes require that we maintain
a minimum net worth and interest coverage ratio, and a maximum leverage ratio and include change of
control provisions, among other things.
Proceeds from the issuance of common stock upon the exercise of stock options during the 2007
six-month period were $10.8 million.
On July 2, 2007 we borrowed funds on our credit facility to purchase Clayton Metals. Our pro forma
net debt-to-total capital ratio for the borrowing was 38.2%.
Capital expenditures were $58.6 million for the six months ended June 30, 2007 compared to $59.7
million during the same prior year period. Our 2007 capital expenditure budget is approximately
$145 million. Our 2007 budget includes several growth initiatives to expand or relocate existing
facilities and to add or upgrade equipment. We had no material changes in commitments for capital
expenditures, operating lease obligations or purchase obligations as of June 30, 2007, as compared
to those disclosed in our table of contractual obligations included in our Annual Report on Form
10-K for the year ended December 31, 2006, except the 2007 acquisitions discussed above. We
anticipate that funds generated from operations and funds available under our $1.1 billion credit
facility will be sufficient to meet our working capital, capital expenditure and senior debt
repayment needs in the near term. We also anticipate that we will be able to fund acquisitions with
borrowings under our line of credit. Our credit facility can be increased from $1.1 billion to
$1.6 billion upon approval of the lenders.
On May 17, 2006 our Board of Directors declared a two-for-one stock split, in the form of a 100%
stock dividend on our common stock. The common stock split was effected by issuing one additional
share of common stock for each share held by shareholders of record on July 5, 2006. The
additional shares were distributed on July 19, 2006. On February 14, 2007, our Board of Directors
declared a 33% increase in the regular quarterly cash dividend to $.08 per share of common stock.
In May 2005, our Board of Directors amended and restated our stock repurchase program authorizing
the repurchase of up to an additional 12.0 million shares of our common stock. Repurchased shares
are treated as authorized but unissued shares. As of June 30, 2007, and prior to the additional
authorization in May 2005, we had repurchased a total of 11.0 million shares of our common stock
under this plan, at an average cost of $7.47 per share. We have not repurchased any shares of our
common stock since 2000. We believe such purchases, given appropriate circumstances, enhance
shareholder value and reflect our confidence in the long-term growth potential of our Company.
28
Inflation
Our operations have not been, and we do not expect them to be, materially affected by general
inflation. Historically, we have been successful in adjusting prices to our customers to reflect
changes in metal prices.
Seasonality
Some of our customers may be in seasonal businesses, especially customers in the construction
industry. As a result of our geographic, product and customer diversity, however, our operations
have not shown any material seasonal trends except that revenues in the months of July, November
and December traditionally have been lower than in other months because of a reduced number of
working days for shipments of our products, resulting from vacation and holiday closures at some of
our customers. We cannot assure you that period-to-period fluctuations will not occur in the
future. Results of any one or more quarters are therefore not necessarily indicative of annual
results.
Goodwill
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted
to $918.1 million at June 30, 2007, or approximately 22.0% of total assets, or 45.8% of
consolidated shareholders equity. Pursuant to SFAS No. 142, we review the recoverability of
goodwill annually or whenever significant events or changes occur which might impair the recovery
of recorded costs. Our annual impairment tests of goodwill were performed as of November 1, 2006
and it was determined that the recorded amounts for goodwill are recoverable and that no impairment
existed. We are not aware of any significant events or changes that would affect the
recoverability of those amounts as of June 30, 2007.
Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our
unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. When we prepare these financial
statements, we are required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those related to accounts
receivable, inventories, deferred tax assets, goodwill and intangible assets and long-lived assets.
We base our estimates and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the basis for our
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
For further information regarding the accounting policies that we believe to be critical accounting
policies and that affect our more significant judgments and estimates used in preparing our
consolidated financial statements see our December 31, 2006 Annual Report on Form 10-K. We do not
believe that any of our acquisitions completed during 2007 or new accounting standards implemented
during 2007 changed our critical accounting policies.
New Accounting Pronouncements
See Notes to Consolidated Financial Statements for disclosure on new accounting pronouncements.
29
Item 3. Quantitative And Qualitative Disclosures About Market Risk
In the ordinary course of business, we are exposed to various market risk factors, including
fluctuations in interest rates, changes in general economic conditions, domestic and foreign
competition, foreign currency exchange rates, and metals pricing and availability. Please refer to
Item 7A Quantitative and Qualitative Disclosures About Market Risk, contained in the Companys
December 31, 2006 Annual Report on Form 10-K for further discussion on quantitative and qualitative
disclosures about market risk.
Item 4. Controls And Procedures
Under the supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, the Company carried out an
evaluation of the effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to and as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Act
of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that, as of the end of the period covered in this report, the Companys
disclosure controls and procedures are effective. There have been no changes in the Companys
internal control over financial reporting during the quarter ended June 30, 2007, that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
This Form 10-Q may contain forward-looking statements relating to future financial results. Actual
results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has
no control. These risk factors and additional information are included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2006.
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PART II OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In March 2007, the Company issued 6,244 shares of restricted stock to certain Division Managers as
part of their incentive bonus for their 2006 performance, in accordance with the Companys Key-Man
Incentive Plan. These shares were valued at an aggregate value of approximately $280,000, based on
the fair market value of our common stock on the date of the grant. The Company received no
consideration for these shares. The Company relied on the exemptions from registration provided by
Rules 505 and/or 506 of Regulation D.
As a result of an administrative error, in April and May of 2007, three employees of Earle M.
Jorgensen Company, a wholly-owned subsidiary of the Company, were allowed to exercise stock options
before they became exercisable under the terms of the Earle M. Jorgensen Company Stock Option Plan.
These employees, who are not affiliates of the Company, received an aggregate of 1,762 shares at
an exercise price of $24.92 per share, resulting in total proceeds to the Company of $43,909, which
was used to fund working capital needs. Although the shares issuable under the Earle M. Jorgensen
Company Stock Option Plan have been registered with the Securities and Exchange Commission, since
the shares were issued prior to the vesting date, they may be deemed to be technically not
registered. The Company understands that some or all of these shares may have been sold by the
employees without a registration statement having been filed.
Item 4. Submission of Matters to a Vote of Security Holders
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(a) |
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The annual meeting of Reliance Steel & Aluminum Co. shareholders was held on May 16,
2007. |
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(b) |
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[Need not be answered because (1) proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, (2) there was no solicitation in
opposition to managements nominees as listed in the proxy statement, and (3) all such
nominees were elected.] |
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(c) |
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The following is a brief description of matters voted upon at the meeting: |
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Four Class I directors were elected at the annual meeting. Douglas M. Hayes: 66,370,407
shares were voted for election and 332,048 shares were withheld. Franklin R. Johnson:
66,353,289 shares were voted for election and 349,167 shares were withheld. Richard J.
Slater: 66,355,634 shares were voted for election and 346,822 shares were withheld.
Leslie A. Waite: 66,013,431 shares were voted for election and 689,025 shares were
withheld. |
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Based upon the recommendation of the Audit Committee, Ernst & Young LLP was selected as
the Companys independent registered accounting firm to perform the annual audit of the
financial statements of the Company and its subsidiaries for 2007. The selection was
approved: 65,848,393 shares were voted for the proposal, 832,114 shares were voted against
it and 21,949 shares abstained. |
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Item 6. Exhibits
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RELIANCE STEEL & ALUMINUM CO.
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Dated: August 9, 2007 |
By: |
/s/ David H. Hannah
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David H. Hannah |
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Chief Executive Officer |
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By: |
/s/ Karla Lewis
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Karla Lewis |
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Executive Vice President and
Chief Financial Officer |
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33