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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] 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 95-1142616
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2550 EAST 25TH STREET
LOS ANGELES, CALIFORNIA 90058
(213) 582-2272
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price on the New York Stock Exchange on
February 27, 1998 was $540,716,199.44.
As of February 28, 1998, 18,842,708 shares of the registrant's common
stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1998 (the "Proxy Statement") are
incorporated by reference into Part III of this report.
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INDEX
PART I
Item 1. Business.................................................... 1
Industry Overview........................................... 1
Background.................................................. 1
Customers................................................... 4
Suppliers................................................... 5
Backlog..................................................... 5
Products and Processing Services............................ 5
Marketing................................................... 6
50%-Owned Company........................................... 6
Cyclical Nature............................................. 6
Competition................................................. 7
Quality Control............................................. 7
Systems..................................................... 7
Government Regulation....................................... 8
Employees................................................... 8
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 42
SIGNATURES............................................................ 45
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SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the matters discussed in this Annual Report on Form 10-K include
forward-looking statements that involve risks and uncertainties. Among the risks
and uncertainties to which Reliance Steel & Aluminum Co. ("the Company") is
subject are the risks inherent in the industries which the Company serves,
including, but not limited to, the volatility of the transportation,
construction, general manufacturing, aerospace and semiconductor fabrication
industries to which the Company sells products. These industries, and therefore
the Company, are subject to changes in the economy in general. In addition, the
Company has increased its long-term debt as a result of its recent acquisitions
and is subject to increased risks as a result of this higher leverage. The
Company's metals service centers are subject to fluctuations in the price of raw
materials, although the Company is generally able to pass-through increases in
costs of raw materials to its customers. The Company's relationship to and
business dealings with significant vendors and customers and the intense price
competition in the Company's markets also may affect the Company's results.
Recent acquisitions of the Company may not perform as the Company anticipates
after the change in ownership. Accordingly, the actual results realized by the
Company could differ materially from the statements made herein. Potential
investors are cautioned not to place undue reliance on the forward-looking
statements made in this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
Reliance Steel & Aluminum Co. ("Reliance" or the "Company") is one of the
largest metals service center companies in the United States. Through a network
of metals service centers, with 51 processing and distribution facilities
(excluding American Steel L.L.C.'s five facilities) in 20 states, the Company
provides value-added materials management and metals processing services and
distributes a full line of more than 60,000 metal products, including carbon,
alloy, stainless and specialty steel, aluminum, brass and copper products to
more than 40,000 customers in a broad range of industries. Some of these metals
service centers provide processing services for specialty metals only. The
Company's products are currently delivered from facilities in Alabama, Arizona,
California, Colorado, Florida, Georgia, Kansas, Maryland, New Jersey, New
Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Utah, Washington and Wyoming. In addition, one of the Company's
subsidiaries has an international sales office in Marseilles, France. The
Company also has a 50% ownership interest in and operational control of American
Steel, L.L.C., which operates five metals service centers in the Pacific
Northwest and Central California.
INDUSTRY OVERVIEW
Metals service centers acquire products from primary metals producers and
then process carbon steel, aluminum, stainless steel and other metals to meet
customer specifications, using techniques such as cutting-to-length (or
leveling), slitting, blanking, shape cutting, shearing, sawing, precision plate
sawing, twin milling, skin milling, tee splitting, forming and electropolishing.
These processing services save time, labor and expense for customers, thereby
reducing their overall manufacturing costs. Specialized equipment used to
process the metals requires high-volume production to be cost effective. Many
manufacturers are not able or willing to invest in the necessary technology,
equipment and inventory to process the metals for their own manufacturing
operations. Accordingly, industry forces have created a niche in the market to
allow metals service centers, such as Reliance, to purchase, process and deliver
metals to end users in a more efficient and cost-effective manner than the end
user could achieve in dealing directly with the primary producer, or with an
intermediate steel processor. Industry analysts estimate that, historically in
the United States, based on tonnage, metals service centers and processors
purchased approximately 30% of all carbon industrial steel products, 45% of all
stainless steel produced in the United States and 37% of all aluminum sold in
the mill/distributor shared markets (which excludes that sold for aluminum cans,
among other things). The metals distribution industry is currently estimated at
more than $40 billion in revenues in the United States.
The metals service center industry is highly fragmented and intensely
competitive within localized areas or regions. Many of the Company's competitors
operate single stand-alone service centers. According to industry sources, the
number of intermediate steel processors and metals service center facilities in
the United States has been reduced from approximately 7,000 in 1980 to
approximately 3,400 in 1997. The Company believes that this consolidation trend
creates new opportunities for acquisitions.
BACKGROUND
Reliance was organized as a California corporation on February 3, 1939 and
commenced business in Los Angeles fabricating steel reinforcing bar. Within ten
years, it had become a full-line distributor of steel and aluminum, operating a
single metals service center in Los Angeles, California. In the early 1950's,
the Company automated its materials handling operations and began to provide
processing services to meet its customers' requirements. In the 1960's, the
Company began to expand its operations through acquisitions of other companies
and the development of additional service centers and began to establish branch
metals service centers in other geographic areas.
In the mid-1970's, the Company began to establish specialty metals service
centers stocked with inventories of selected metals such as aluminum, stainless
steel, brass and copper, and equipped with automated materials handling and
precision cutting equipment and currently has 43 specialty metals service
centers and eight full-line facilities, not including American Steel L.L.C. The
Company's metals service
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centers are operated under the trade names of "Tube Service Co." (which
processes and distributes specialty tubing), "Bralco Metals" (which processes
and distributes aluminum, brass, copper and stainless steel products), "Reliance
Metalcenter" (which processes and distributes a variety of metals products),
"Reliance Steel Company" (which processes and distributes carbon steel
products), and "Affiliated Metals" (which processes and distributes primarily
flatrolled aluminum and stainless steel products). MetalCenter, Inc. specializes
in processing and distributing non-ferrous products. CCC Steel, Inc. ("CCC
Steel") has two metals service centers which specialize in processing and
distributing structural steel products. Siskin Steel & Supply Company, Inc.
("Siskin") operates five full-line metals service centers, including Georgia
Steel Supply Company ("Georgia Steel"). AMI Metals Inc.'s ("AMI") six metals
service centers process and distribute aluminum products primarily for the
aerospace industry. Amalco Metals, Inc. ("Amalco") operates one facility to
process and distribute aluminum products primarily for the electronics industry.
Service Steel Aerospace Corp. ("SSA") has three facilities processing and
distributing stainless and alloy specialty steels primarily for the aerospace
industry. Phoenix Metals Company ("Phoenix") operates four non-ferrous metals
service centers. Durrett Sheppard Steel Co., Inc. ("DSS") is a specialty metals
service center, which processes and distributes carbon steel plate, bar and
structural products. Valex Corp. ("Valex") consists of one specialty tubing
service center with six distribution centers and one international sales office.
The "American Steel" and "American Metals" divisions of American Steel, L.L.C.
process and distribute primarily carbon steel products from five metals service
centers.
The Company serves its customers primarily by providing quick delivery,
metals processing and inventory management services. The Company purchases a
variety of metals from primary producers and sells these products in smaller
quantities. For approximately 60% of its sales, the Company performs metals
processing, or first stage processing, services before distributing the product
to manufacturers and other end users, generally within 24 hours from receipt of
an order, for orders that do not require extensive or customized processing.
Metals processing services include leveling, slitting, blanking, shape cutting,
shearing, sawing, precision plate sawing, twin milling, skin milling, tee
splitting, forming, and electropolishing, all to customer specifications. See
"Business -- Products and Processing Services". These services save time, labor
and expense for customers and reduce customers' overall manufacturing costs.
During 1997, the Company's metals service centers handled approximately 4,100
transactions per business day, with an average revenue of approximately $1,025
per transaction.
The Company has a history of expansion through acquisitions, as well as
from internal growth. Since its initial public offering in September 1994,
Reliance has successfully completed and integrated ten acquisitions. The
acquisitions of Phoenix and DSS occurred in 1998. Prior to going public, the
Company was also very aggressive in making acquisitions, with twenty
acquisitions from 1984 to September 1994.
On January 30, 1998, the Company acquired all of the outstanding capital
stock of Phoenix Corporation, doing business as Phoenix Metals Company
("Phoenix"), for $21 million. Phoenix operates metals service centers
specializing in non-ferrous products in Birmingham, Alabama; Norcross (Atlanta),
Georgia; Charlotte, North Carolina; and Tampa, Florida. Phoenix had net sales of
approximately $119 million in the eleven months ended January 29, 1998. The
Company believes that the acquisition of Phoenix enhances the Company's position
in the southeastern United States and complements Siskin's range of products.
On January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Co., L.L.C. and its subsidiary Durrett-Sheppard Steel of
Pennsylvania, Inc., for $30.5 million, through its newly-formed subsidiary,
Durrett Sheppard Steel Co., Inc. ("DSS"). DSS consists of one carbon steel
metals service center located in Baltimore, Maryland. Durrett-Sheppard Steel
Co., L.L.C., had revenues of approximately $47 million for the twelve months
ended September 30, 1997.
On December 1, 1997, the Company acquired 100% of the outstanding common
stock of Georgia Steel, which operates one metals service center in Atlanta,
Georgia. Georgia Steel processes and distributes primarily carbon steel products
and is operating as a wholly-owned subsidiary of Siskin. Georgia Steel's net
sales for the eleven months ended November 30, 1997 were approximately $20
million. Georgia Steel's net sales for the one month period ending December 31,
1997, were $1.5 million, which were included in consolidated net sales of the
Company for 1997.
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On October 1, 1997, the Company acquired 100% of the outstanding common
stock of SSA, which operates metals service centers in Tacoma, Washington; North
Canton, Ohio; and Long Beach, California. SSA specializes in stainless and alloy
specialty steel products primarily for the aerospace industry, thereby expanding
the Company's position in this growing industry. Net sales of SSA for the nine
months ended September 30, 1997, were approximately $39 million. For the three
months ended December 31, 1997, SSA's net sales were $14 million, which were
included in consolidated net sales of the Company for 1997.
On April 30, 1997, the Company completed its acquisition of 100% of the
outstanding capital stock of Amalco. Amalco, a leading non-ferrous metals
service center located in northern California, processes and distributes
aluminum products primarily for the electronics industry. The Company intends to
combine the business of Amalco with Reliance's existing metals service center in
Santa Clara, California upon completion of a new, enlarged, state-of-the-art
facility in Union City, California, which the Company expects to complete in
1998. For the twelve months ended April 30, 1997, Amalco's net sales were
approximately $26 million. Amalco's net sales were $21 million for the eight
months ended December 31, 1997, and were included in consolidated net sales of
the Company for 1997.
On April 2, 1997, the Company acquired 100% of the capital stock of AMI for
$38.5 million in cash. AMI is headquartered in Brentwood, Tennessee, with
additional operating facilities in Fontana, California; Wichita, Kansas; Fort
Worth, Texas; Kent, Washington; and Swedesboro, New Jersey. AMI specializes in
the processing and distribution of aluminum plate, sheet and bar products
primarily for the aerospace industry. For the twelve months ended February 28,
1997, AMI's net sales were approximately $77 million. AMI's net sales were $98
million for the nine months ended December 31, 1997, and were included in
consolidated net sales of the Company for 1997. AMI significantly enhances
Reliance's position in the expanding aerospace sector.
On October 1, 1996, the Company acquired 100% of the outstanding capital
stock of Siskin for total consideration of $71 million in cash, which was
financed by a private placement of debt. Siskin is based in Chattanooga,
Tennessee; with additional operating facilities in Birmingham, Alabama;
Spartanburg, South Carolina; and Nashville, Tennessee. Siskin's net sales for
the twelve months ended December 31, 1997, were $159 million. Siskin established
a strong presence for Reliance in the southeastern United States.
In April 1996, the Company acquired 100% of the outstanding capital stock
of CCC Steel, a privately-held carbon steel service center, for $25 million in
cash. CCC Steel has facilities in Los Angeles, California, and Salt Lake City,
Utah. CCC Steel is known as one of the largest structural steel distribution
companies in the Western United States. CCC Steel's net sales were $63 million
for the twelve months ended December 31, 1997.
In January 1996, the Company purchased certain assets of a metals service
center in Albuquerque, New Mexico. These assets were combined with the Company's
existing non-ferrous metalcenter operation in Albuquerque. Also in January 1996,
the Company opened a Tube Service facility in Denver, Colorado.
In the fourth quarter of 1996, the Company completed construction and
relocated the Bralco Metals operation near Los Angeles, California and the
Affiliated Metals operation in Salt Lake City, Utah to new, larger, more
efficient, state-of-the-art facilities. Valex, a 97%-owned subsidiary of the
Company that is a leading domestic manufacturer of electropolished stainless
steel tubing and fittings primarily used in the construction and maintenance of
semiconductor manufacturing plants, opened its first international sales office
in 1996, located in Marseilles, France.
The Company's executive officers maintain financial controls and establish
general policies and operating guidelines, while its division managers and
subsidiary officers have virtual autonomy with respect to day-to-day operations.
This balanced, yet entrepreneurial management style has enabled the Company to
improve the productivity and profitability both of acquired businesses and of
its own expanded operations. Successful division managers and other management
personnel are awarded incentive compensation based in part on the profitability
of their particular division or subsidiary and in part based on the overall
profitability of the Company.
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The Company has adopted a long-term business strategy to increase its
profitability through expansion of its existing operations and acquisitions of
businesses that are strategically located or positioned to diversify or enhance
the Company's customer base, product range and geographic coverage. The Company
has developed an excellent reputation in the industry for its integrity and the
quality and timeliness of its service to customers.
CUSTOMERS
Customers purchase from service centers to obtain value-added metals
processing, readily available inventory, reliable and timely delivery, flexible
minimum order size and quality control. Many customers deal exclusively with
service centers because the quantities of metal products that they purchase are
smaller than the minimum orders specified by mills or because those customers
require intermittent deliveries over long or irregular periods. The Company
believes that metals service centers have also enjoyed an increasing share of
total metal shipments because of the focus of the capital goods and related
industries on just-in-time inventory management, materials management
outsourcing and because metal producers have reduced in-house direct sales
efforts to small sporadic purchasers in order to enhance their production
efficiency.
The Company has more than 40,000 customers. Approximately 17,000 customers
actively purchase from the Company from month to month. In 1997, only one
customer accounted for more than 1% of the Company's sales, with sales to this
one customer representing 4.1% of total Company sales. During 1997, more than
85% of the Company's orders were from repeat customers. Reliance's customers are
manufacturers and end users in the general manufacturing, construction (both
commercial and residential), transportation (rail, truck and auto after-market),
aerospace and semiconductor manufacturing industries. The Company's metals
service centers wrote and delivered over 932,000 orders from its customers, at
an average price of approximately $1,025, during 1997. Most of the customers who
purchase from the Company's various metals service centers are located within a
150-mile radius of the metals service centers; the proximity of the centers to
the customers assists the Company in providing just-in-time delivery to its
customers on its fleet of 312 owned or leased trucks. Approximately 3% of the
Company's sales were to international customers in 1997. Valex has a network of
distribution centers throughout the United States which provide quick and
personal service to its customers, which the Company believes is unmatched by
any of Valex's competitors. This strategy also resulted in the opening of an
international sales office for Valex during 1996 to provide support to the
European market. Moreover, Reliance's computerized order entry system and
flexible production scheduling also enables the Company to meet customer
requirements for short lead times and just-in-time delivery.
The Company believes that its long-term relationships with many of its
customers significantly contribute to the success of its business. Providing
prompt and efficient services and quality products at a reasonable price is an
important factor in maintaining these relationships.
Many of the industries in which the Company's customers compete are
cyclical in nature and are subject to changes in demand based on general
economic conditions. Because the Company sells to a wide variety of customers in
several industries, management believes that the effect of such changes on the
Company is significantly reduced. The Company can give no assurance, however,
that it will be able to increase or maintain its level of sales in periods of
economic downturn. Currently, the semiconductor manufacturing industry in which
Valex's customers operate, which is highly cyclical in nature and subject to
changes in demand based on, among other things, general economic conditions and
industry capacity, has suffered a significant slowdown. In addition, the
aerospace industry experienced a significant improvement during 1997, which the
Company believes will continue for at least the next two years, subject to
changes in demand based on, among other things, general economic conditions and
industry capacity.
Historically, the Company's largest market for its products has been
California, representing 45% of the Company's 1997 sales. Although California
continues to be the largest market, the Company has expanded its facilities
geographically as a result of strategic acquisitions and has increased its
physical capabilities through capital expenditures to reduce the impact of any
regional economic recession on the Company's operations.
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SUPPLIERS
Reliance purchases its products from the major metals producers, both
domestic and foreign and has multiple suppliers for all of its product lines.
The Company's major suppliers of domestic carbon steel products include
California Steel Industries, Geneva Steel, Huntco Steel, Nucor Steel, Nucor
Yamato and USS-POSCO Industries. Allegheny Ludlum Steel Corp., Cromweld Steels
Ltd., International Stainless Steel Corp. and North American Stainless supply
stainless steel products. The Company is a recognized distributor for various
major aluminum companies, including Aluminum Company of America ("Alcoa"), Alcan
Aluminum Limited, Alumax Mill Products, Century Aluminum, Commonwealth Aluminum,
Kaiser Aluminum and Reynolds Metals. The Company's total volume of purchases
enables it to purchase substantially all of its inventory at the best prices
offered by the suppliers, given the order size. The Company believes that it is
not dependent on any one of its suppliers for metals and that its relationships
with its suppliers are very strong. The Company has worked closely with its
suppliers in order to become an important customer for each major supplier of
the Company's metals for its core product lines.
BACKLOG
Because of the just-in-time delivery policy and the short lead time nature
of its business, the Company does not believe the information on backlog of
orders is material to an understanding of its metals service center business.
PRODUCTS AND PROCESSING SERVICES
At its metals service centers, the Company provides processing services,
such as leveling, slitting, blanking, shape cutting, shearing, sawing, precision
plate sawing, twin milling, skin milling, tee splitting, forming or
electropolishing to each customer's specifications and delivers the products to
manufacturers and other end users. For orders other than those requiring
extensive or specialized processing, delivery to the customer generally occurs
within 24 hours from receipt of the initial order. The Company's sales of its
more than 60,000 products in 1997 comprised the following approximate
percentages by commodity and product: 19% were heat treated aluminum plate,
sheet and coil; 12% were carbon steel structurals; 8% were aluminum bar and
tube; 8% were stainless steel plate, sheet and coil; 7% were common alloy
aluminum plate, sheet and coil; 7% were carbon steel tubing; 7% were carbon
steel plate; 6% were carbon steel bar; 5% were galvanized steel sheet and coil;
5% were stainless steel bar and tube; 4% were cold rolled steel sheet and coil;
4% were hot rolled steel sheet and coil; 4% were electropolished stainless steel
tubing and fittings; and 4% were miscellaneous, such as brass and copper. The
Company has reduced its dependence on any particular customer group or industry
by processing a variety of metals. This diversification of product type and
material has reduced the Company's exposure to fluctuations or other weaknesses
in the financial or economic stability of particular customers or industries, as
well as reducing its dependence on particular suppliers.
The Company maintains a wide variety of products in inventory. For the
Company's largest product type (sheet and coil), the Company purchases coiled
metal from primary producers in the form of a continuous sheet, typically 36 to
60 inches wide, between .25 and .015 inches thick, and rolled into 3- to 20-ton
coils. Because of the size and weight of these coils and the specialized
equipment required to move and process the coils into smaller sizes and various
products, few of the Company's customers have the capability of processing the
metal into the desired products.
Reliance enters its customer orders, once received, in a computerized order
entry system, selects appropriate inventory and schedules the processing in
accordance with the specified delivery date, generally within 24 hours for the
majority of its orders. The Company attempts to maximize the yield from the
various metals that it processes by combining customer orders to use each
purchased product to the fullest extent practicable.
Few metals service centers offer the full scope of processing services and
metals that Reliance uses to produce the desired end products. Leveling
(cutting-to-length) involves cutting metal along the width of a coil into
specified lengths of sheets or plates. Slitting involves cutting metal to
specified widths along the length of the coil. Blanking cuts the metal into
close tolerance, square or rectangular shapes. Shape cutting, or burning,
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can produce various shapes according to customer-supplied drawings through the
use of CNC controlled machinery. This procedure can include the use of oxy-fuel,
plasma, high-definition plasma, or laser burning for carbon and stainless steel
plate and routing for aluminum plate. Shearing cuts the metal into small precise
pieces. Precision plate sawing involves sawing plate (primarily aluminum plate
products) into square or rectangular shapes to tolerances as close as 0.003 of
an inch. Twin milling grinds one or all six sides of a small square or
rectangular piece of aluminum plate into close tolerance. Skin milling grinds
the top and/or bottom of a large aluminum plate into close tolerance. Tee
splitting involves splitting metal beams. Forming involves bending and forming
plate or sheet products into customer specified shapes and sizes with press
brakes. Electropolishing is the process used on stainless steel tubing and
fittings to simultaneously smooth, brighten, clean, and passivate the interior
surfaces of these components. Electropolishing is a selective electrochemical
removal process that selectively removes a thin layer of metal, including
surface flaws and imbedded impurities. Electropolishing is now a required
surface treatment process for all Ultra High-Purity components used in the gas
distribution systems of semiconductor manufacturers worldwide and many sterile
water distribution systems of pharmaceutical and biotechnology companies.
Reliance generally processes specific metals to non-standard sizes only at the
request of customers pursuant to purchase orders rather than maintaining an
inventory of finished products. The Company is required to carry a wide range of
inventories of metals, however, to meet the short lead time and just-in-time
delivery requirements of its customers. Each of the Company's metals service
centers maintains equipment selected to meet the needs of that facility's
customers.
MARKETING
Reliance's more than 485 sales personnel are located in twenty-four states
and France to provide marketing services throughout each of the geographic
locations served. The sales personnel are organized by division or subsidiary
among the Company's profit centers and are divided into two groups: those who
travel throughout a specified geographic territory to maintain relationships
with the Company's existing customers and to develop new customers ("outside
sales personnel") and those who remain at the facilities to write and price
orders ("inside sales personnel"). The inside sales personnel generally receive
incentive compensation, in addition to their base salary, based on the
respective profit center's gross profit, and the outside sales personnel
generally receive incentive compensation based on gross profit from their
respective geographic territories.
50%-OWNED COMPANY
On July 1, 1995, the Company acquired a 50% interest in and operational
control of American Steel, L.L.C. ("American Steel"), a newly-formed limited
liability company, for $19.25 million in cash. As part of the acquisition, the
Company contributed cash, American Industries, Inc. ("American") contributed
assets and each also contributed its 50% ownership in American Metals
Corporation ("American Metals"), a joint venture established between the Company
and American in 1993. American Steel consisted of three metals service centers
in the Pacific Northwest, that were previously wholly-owned by American. The
facility in Canada was sold in January 1997. American Metals, which operates
three metals service centers located in the Central Valley of California, is a
wholly-owned subsidiary of American Steel. The purchase agreement allows the
Company to acquire the remaining 50% of American Steel at a future date. This
50% investment in American Steel is accounted for by the equity method, whereby
the Company includes 50% of American Steel's consolidated earnings in the
Company's net income and earnings per share amounts.
CYCLICAL NATURE
The Company distributes metal products to customers in a variety of
industries, including manufacturing, construction, transportation, aerospace and
semiconductor fabrication. Many of the industries in which the Company's
customers compete are cyclical in nature and are subject to changes in demand
based on general economic conditions. Because the Company sells to a wide
variety of customers in several industries, management believes that the effect
of such changes on the Company is significantly reduced. The Company can give no
assurance, however, that it will be able to increase or maintain its level of
sales in periods of economic downturn.
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The semiconductor fabrication industry is highly cyclical in nature and is
subject to changes in demand based on, among other things, general economic
conditions and industry capacity. After a significant period of growth from 1993
to 1996, this industry has experienced a significant slowdown which began in
mid-1996. On the other hand, the aerospace industry experienced a significant
improvement during 1997, which the Company expects to continue for at least the
following two years, subject to changes in demand based on, among other things,
general economic conditions and industry capacity.
The Company's largest market for its products is California. The Company
has expanded its facilities geographically as a result of strategic acquisitions
and has increased its physical capabilities through capital expenditures to
reduce the impact of any regional economic recession on the Company's
operations.
COMPETITION
The metals distribution industry is highly fragmented and competitive. The
Company has numerous competitors in each of its product lines and geographic
locations, although competition is most frequently local or regional. Most of
these competitors are smaller than the Company. Nonetheless, the Company faces
strong competition from national, regional and local independent metals
distributors, subsidiaries of metal producers and the producers themselves, some
of which have greater resources than the Company. Based on an industry report,
it is estimated that there were approximately 3,400 intermediate steel
processors and metals service center facilities in the United States in 1997.
The Company believes that it is one of the ten largest service center companies
in the United States. Competition is based on price, service, quality and
availability of products. The Company maintains centralized relationships with
its suppliers and a decentralized operational structure. The Company believes
that this division of responsibility has increased its ability to obtain
competitive prices of metals and to provide more responsive service to its
customers. In addition, Reliance believes that the size of inventory it
maintains, the different metals and products it has available and the wide
variety of processing services it provides distinguish the Company from its
competition.
QUALITY CONTROL
The procurement of high quality metal from suppliers on a consistent basis
is critical to the Company's business. The Company has instituted strict quality
control measures to assure that the quality of purchased metals will enable the
Company to meet the specifications of its customers and to reduce the costs of
production interruptions. Physical and chemical analyses are performed on
selected metals to verify that their mechanical and dimensional properties,
cleanliness and surface characteristics meet the Company's requirements. Similar
analyses are conducted on processed metal on a selected basis before delivery to
the customer. The Company believes that maintenance of high standards for
accepting metals ultimately results in reduced return rates from its customers.
The Company has established a program to obtain certification of its
locations under the ISO 9002 internationally-accepted quality standard. Most of
the Company's metals service center divisions have already attained ISO 9002
certification, with the remaining three divisions and CCC Steel expected to
become certified in mid-1998. MetalCenter, Inc. and Valex have attained ISO 9002
certification. The Company has established a program for its other
recently-acquired subsidiaries to obtain such certification in the future.
Management believes this certification will provide access to additional
customers and improve operating efficiency.
SYSTEMS
The Company is in the process of converting its Reliance divisions from its
internally-developed software, which runs on an IBM mainframe computer, to the
Stelplan manufacturing and distribution information systems, which uses IBM
RS6000 multi-processor based hardware. This conversion is scheduled to be
completed during 1999. All of the AMI and American Steel service centers and
MetalCenter, Inc. use Stelplan, with SSA and DSS planning to convert to Stelplan
prior to the Year 2000. Stelplan is an integrated business application system
with functions ranging from order entry to the generation of financial
statements. Stelplan is a registered trademark of Planmatics Corp. Stelplan was
developed specifically for the metals service center and processor industry.
Stelplan also provides real time availability of information such as
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inventory availability, location and cost. Access to this information allows the
Company's marketing and sales personnel to respond to the customer's needs more
efficiently and more effectively and to provide quickly a product price. In
addition, the Company has received a letter from Planmatics Corp. stating that
Stelplan is "Year 2000" compliant. The Company, working with its respective
software vendors, has adopted plans to make the minor modifications required
with respect to those of its subsidiaries that are not converting to Stelplan
before the Year 2000.
GOVERNMENT REGULATION
The Company's metals service centers are subject to many federal, state and
local requirements relating to the protection of the environment including
hazardous waste disposal and underground storage tank regulations. The only
hazardous wastes that the Company uses in its operations are lubricants and
cleaning solvents. The Company frequently examines ways to minimize any impact
on the environment and to effect cost savings relating to environmental
compliance. The Company pays state certified private companies to haul and
dispose of its hazardous waste.
Management believes that the Company is in material compliance with all
applicable environmental laws and that the Company's products and processes do
not present any unusual environmental concerns. The Company does not anticipate
any material expenditures to meet environmental requirements. Some of the
properties owned or leased by the Company are located in industrial areas,
however, with histories of heavy industrial use. The location of these
properties may result in the Company's incurring environmental liabilities that
arise from causes other than the operations of the Company, but the Company does
not expect that any such liabilities will have a material adverse impact on the
Company's results of operations, financial condition or liquidity. In addition,
environmental audits are performed during the due diligence process for
acquisitions, so that the Company does not assume any material environmental
exposure as the result of an acquisition.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, principally the Occupational Health and
Safety Act and regulations thereunder, which, among other requirements,
establish noise, dust and safety standards. Reliance has established a strict
safety policy, which it believes is one of the best in the industry. Management
believes that the Company is in material compliance with applicable laws and
regulations and does not anticipate that future compliance with such laws and
regulations will have a material adverse effect on the results of operations or
financial condition of the Company.
EMPLOYEES
As of February 28, 1998, the Company had a total of approximately 2,750
employees. Approximately 535 of these employees are covered by collective
bargaining agreements, which expire at various times over the next five years.
The Company has entered into collective bargaining agreements with nine
different union locals at eleven of its locations. The Company has not found
that these collective bargaining agreements have had a material impact either
favorably or unfavorably on the Company's revenues or profitability at its
various locations. The Company has always maintained excellent relations with
its employees and has never experienced a significant work stoppage.
ITEM 2. PROPERTIES.
The Company maintains 51 metals service center processing and distribution
facilities in 20 states (not including American Steel), plus its corporate
headquarters and one international sales office. All of the Company's properties
are in good or excellent condition and are adequate for its existing operations.
These facilities generally operate at about 60% of capacity, with each division
averaging slightly less than two shifts operating at full capacity for a
five-day work week. Twenty of these facilities are leased. Siskin leases a
portion of its facilities in Chattanooga, Tennessee. In addition, off-site space
is leased near the facilities in Ventura, California; Baltimore, Maryland; and
Santa Clara, California. The leases are for terms expiring at various times
through 2011 and have an aggregate monthly rent of approximately $260,000. The
Company owns all other properties. In 1996, the Company relocated its Affiliated
Metals operation in Salt Lake City, Utah, and its Bralco Metals operation in
Pico Rivera, California, to new, larger, more efficient, state-of-the-art
facilities.
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The Company's new, enlarged, state-of-the-art facility in Union City, California
is scheduled to be completed in early 1998. Upon completion, the business of
Amalco will be combined in the new facility with Reliance's metals service
center which is currently located in Santa Clara, California. The following
table sets forth certain information with respect to each facility:
FACILITIES AND PLANT SIZE
PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
Alabama:
Birmingham
(Siskin)............................................... 107,000
(Phoenix).............................................. 40,000
Arizona:
Phoenix
(Reliance Metalcenter)................................. 104,000
(Bralco Metals)........................................ 46,000
(Tube Service)......................................... 23,000
(Valex)................................................ 5,000*
California:
El Cajon (Tube Service)................................... 18,000
Fontana (AMI)............................................. 103,000
La Mirada (Bralco Metals)................................. 140,000
Long Beach (SSA).......................................... 8,000*
Los Angeles
(Corporate Office)..................................... 22,000
(Reliance Steel Company)............................... 270,000*
Milpitas (Tube Service)................................... 58,000
National City (Reliance Metalcenter)...................... 74,000
Rancho Dominguez (CCC Steel).............................. 316,000
Santa Clara
(Reliance Metalcenter)................................. 99,000*
(Valex)................................................ 7,000*
Santa Fe Springs
(MetalCenter).......................................... 155,000
(Tube Service)......................................... 66,000
Union City (Amalco)....................................... 55,000
Ventura (Valex)........................................... 103,000
Colorado:
Colorado Springs (Reliance Metalcenter)................... 68,000
Denver (Tube Service)..................................... 21,000*
Florida:
Tampa (Phoenix)........................................... 32,000
Georgia:
Atlanta (Georgia Steel)................................... 81,000
Norcross (Phoenix)........................................ 170,000
Kansas:
Wichita
(AMI).................................................. 35,000*
(Reliance Metalcenter)................................. 45,000*
Maryland:
Baltimore (DSS)........................................... 260,000
New Jersey:
Swedesboro (AMI).......................................... 22,000*
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PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
New Mexico:
Albuquerque
(Reliance Metalcenter)................................. 44,000
(Reliance Steel Company)............................... 34,000
(Valex)................................................ 7,000*
North Carolina:
Charlotte (Phoenix)....................................... 41,000*
Ohio:
North Canton (SSA)........................................ 20,000*
Oregon:
Portland
(Reliance Metalcenter)................................. 44,000
(Valex)................................................ 8,000*
Pennsylvania:
Allentown (Valex)......................................... 5,000*
South Carolina:
Spartanburg (Siskin)...................................... 96,000
Tennessee:
Brentwood (AMI)........................................... 27,000*
Chattanooga (Siskin)...................................... 439,000
Nashville (Siskin)........................................ 117,000
Texas:
Arlington (Reliance Metalcenter).......................... 97,000
Austin (Valex)............................................ 8,000*
Fort Worth (AMI).......................................... 75,000*
San Antonio (Reliance Metalcenter)........................ 77,000
Utah:
Salt Lake City
(Reliance Metalcenter)................................. 105,000
(Affiliated Metals).................................... 86,000
(CCC Steel)............................................ 51,000
Washington:
Auburn (AMI).............................................. 27,000*
Tacoma (SSA).............................................. 26,000*
Wyoming:
Casper (Reliance Metalcenter)............................. 11,000*
Sales Office
Marseilles, France (Valex)................................ 700*
- ---------------
* Leased. All other facilities owned.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is named as a defendant in legal actions
arising out of its normal course of business. The Company is not a party to any
pending legal proceedings other than routine litigation incidental to the
business. Management believes that the resolution of such matters will not have
a material adverse effect on the Company's results of operations or financial
condition. The Company maintains liability insurance against risks arising out
of its normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed for trading on the New York Stock
Exchange and was first traded on September 16, 1994. The following table
reflects the range of high and low selling prices of the Company's Common Stock
by quarter for 1997 and 1996. This information is based on composite selling
prices reported by the New York Stock Exchange.
1997 1996
------------------ ----------------
HIGH* LOW* HIGH* LOW*
------- ------- ------ ------
First Quarter......................... $23.167 $17.583 $16.43 $12.00
Second Quarter........................ 26.250 19.583 26.00 15.42
Third Quarter......................... 32.625 25.625 25.50 21.17
Fourth Quarter........................ 30.625 26.500 27.08 22.83
- ---------------
* Adjusted to reflect the 3:2 stock split in June 1997.
As of March 19, 1998, there were approximately 307 record owners of
Reliance Common Stock.
The Company has paid quarterly cash dividends on its Common Stock for
approximately 38 years. In 1995, the Company paid quarterly cash dividends at
the rate of $0.017 per share and paid a special annual dividend of $0.03 per
share. In 1996, the Company paid regular quarterly cash dividends at the rate of
$0.02 per share and paid a special annual dividend of $0.04 per share. In 1997,
the Company paid quarterly dividends of $0.035 per share, resulting in quarterly
dividends of $0.12 after the effect of the 3:2 stock split in June 1997. The
Company paid a special annual dividend of $0.05 per share in 1997. From time to
time, the Company has also paid stock dividends. Most recently, the Company
effected a 3:2 stock split in the form of a 50% stock dividend in June 1997,
which is reflected in the above dividend amounts.
In February 1998, the Company announced that it had increased the regular
quarterly dividend to $0.06 per share, which includes one quarter of the former
annual special cash dividend, which is now included in the regular quarterly
dividend. At the present time, the Company intends to continue paying regular
quarterly cash dividends, but the Board of Directors may reconsider or revise
this policy from time to time based on conditions then existing, including the
Company's earnings, financial condition and capital requirements, as well as
other factors the Board of Directors may deem relevant. It is likely that the
Board of Directors will continue to declare and pay dividends in the future,
provided that earnings are legally available for dividends, but the Board also
intends to continue its present policy of retaining a portion of earnings for
reinvestment in the operations of the Company and the expansion of its business.
The Company can give no assurance, however, that either cash or stock dividends
will be paid in the future, or that, if paid, the dividends will be at the same
amount or frequency as paid in the past.
The private placement debt agreements for the unsecured senior notes
contain covenants which, among other things, require the maintenance of a
minimum net worth that may restrict the Company's ability to pay dividends. In
addition, the syndicated line of credit agreement limits cash dividends payable
by the Company to not more than 25% of the Company's net income for the
immediately preceding fiscal year commencing in 1998. Since its initial public
offering in September 1994, the Company has paid betweeen 6% and 8% of its
earnings to its shareholders as dividends.
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The following table sets forth certain information with respect to cash
dividends paid by the Company during the past two fiscal years:
DATE OF DECLARATION RECORD DATE PAYMENT DATE DIVIDENDS(1)
------------------- ----------- ------------ ---------------
11/21/97.............................. 12/19/97 1/9/98 $.035 per share
8/22/97.............................. 9/2/97 9/10/97 $.035 per share
5/22/97.............................. 6/5/97 6/12/97 $.023 per share
2/21/97.............................. 3/14/97 4/4/97 $.023 per share
2/21/97.............................. 3/14/97 4/4/97 $.047 per share
11/25/96.............................. 12/10/96 1/10/97 $.020 per share
8/26/96.............................. 8/30/96 9/6/96 $.020 per share
5/23/96.............................. 6/3/96 6/10/96 $.020 per share
2/22/96.............................. 3/11/96 3/29/96 $.020 per share
2/22/96.............................. 3/11/96 3/29/96 $.040 per share
- ---------------
(1) Amounts have been restated to reflect the June 1997 3:2 stock split.
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ITEM 6. SELECTED FINANCIAL DATA.
The Selected Consolidated Financial Data presented below should be read in
connection with the accompanying Consolidated Financial Statements of the
Company and the notes related thereto and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Net sales...................... $961,518(1) $653,975(1) $561,341(1) $446,866 $371,207
Cost of sales.................. 737,500 492,199 432,059 344,705 287,090
-------- -------- -------- -------- --------
Gross profit................... 224,018 161,776 129,282 102,161 84,117
Warehouse, delivery, selling,
general and administrative
expenses (2)................. 164,580 118,089 94,609 77,638 68,738
-------- -------- -------- -------- --------
Income from operations......... 59,438 43,687 34,673 24,523 15,379
Other income (expense):
Interest expense.......... (10,861) (3,940) (1,595) (2,120) (2,329)
Other income.............. 3,611 4,464 2,318(3) 1,799(3) 1,921(3)
Equity earnings (losses) of
50%-owned company and joint
venture...................... 5,798 5,340 3,199 48 (38)
-------- -------- -------- -------- --------
Income before income taxes..... 57,986 49,551 38,595 24,250 14,933
Income taxes................... (23,810) (19,761) (15,893) (9,840) (5,701)
-------- -------- -------- -------- --------
Net income..................... $ 34,176 $ 29,790 $ 22,702 $ 14,410 $ 9,232
======== ======== ======== ======== ========
Earnings per
share -- Diluted(4)(5)....... $ 2.15 $ 1.90 $ 1.45 $ 1.14 $ 0.82
Earnings per
share -- Basic(4)(5)......... $ 2.17 $ 1.93 $ 1.46 $ 1.14 $ 0.83
Weighted average common shares
outstanding -- Diluted(4).... 15,875 15,680 15,591 12,624 11,282
Weighted average common shares
outstanding -- Basic(4)...... 15,736 15,460 15,520 12,597 11,080
Cash dividends per
share -- Diluted(4)............ $ .16 $ 0.12 $ 0.10 $ 0.10 $ 0.10
Balance Sheet Data (December 31):
Working capital................ $213,252 $136,765 $100,731 $ 84,490 $ 60,790
Total assets................... 583,866 391,176 260,473 199,421 163,369
Long-term debt................. 143,350 107,450 30,350 8,532 37,989
Shareholders' equity........... 313,164 192,642 163,917 149,983 90,101
- ---------------
(1) Does not include consolidated revenues of $183.7 million, $178.9 million and
$86.4 million for American Steel, L.L.C. for the twelve months ended
December 31, 1997 and 1996, and the period July 1 to December 31, 1995,
respectively, as this 50% investment is accounted for by the equity method,
whereby the Company includes 50% of American Steel's consolidated earnings
in the Company's net income and earnings per share amounts.
(2) Includes depreciation and amortization amounts.
(3) Includes income received from rental agreements with and services provided
to FRLP (as defined in Note 3 to the Consolidated Financial Statements),
which was dissolved effective September 30, 1995.
(4) Amounts have been retroactively adjusted to reflect the March 1993 5% stock
dividend, the 2:1 stock split effective May 1994, and the June 1997 3:2
stock split.
(5) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and the impact of
Statement No. 128, see Note 9 to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During 1997, the Company experienced record sales and earnings results,
primarily due to the inclusion of sales and earnings of companies acquired by
Reliance during 1996 and 1997. The Company experienced pricing pressures for
some of its products, particularly non-ferrous and stainless steel products.
Sales prices to customers for those products decreased because of the lower
costs of those materials. However, the Company was able to somewhat offset these
declining sales prices with increased sales prices for heat treated aluminum
products and certain structural steel products during 1997. There was a
significant demand and a restricted supply for heat treated aluminum by the
aerospace industry in 1997, allowing higher prices to be realized on the sales
of these products. The 1997 supply and demand levels for heat treated aluminum
products are expected to continue through at least the first half of 1998. In
addition, as a result of certain of the Company's acquisitions during 1997, the
product mix shifted to a larger percentage of heat treated aluminum and other
higher than average margin products sold as compared to 1996. The Company
believes its results have been less volatile to the economic trends affecting
the industry because its operations are geographically diversified, it has a
wide range of products, and its customer base and the industries to which it
sells are highly diversified.
Reliance's diversification and financial performance have benefited from
several significant acquisitions during the reported periods, each of which has
been immediately accretive to earnings. Additionally, the Company's successful
efforts to continue to expand through strategic acquisitions and to increase its
efficiencies and physical capacities through capital expenditure programs have
enabled it to lessen the impact of regional economic recessions on the overall
results of its operations. Management believes that the Company is positioned to
take full advantage of improved economic environments, while at the same time it
is poised to operate efficiently in less favorable economies because of its
tight cost controls, high inventory turnover and diversification.
RECENT DEVELOPMENTS
During 1997, the Company completed four acquisitions. These acquisitions
were financed by a secondary public equity offering, and the private placement
of senior unsecured debt. In addition, the Company entered into a new syndicated
bank line of credit, which allows for increased borrowings, and effected a 3:2
stock split in the form of a stock dividend. The two acquisitions completed in
January 1998 were financed with the balance of the public offering proceeds and
borrowings under the new line of credit.
On January 30, 1998, the Company completed its acquisition of all the
outstanding capital stock of Phoenix Corporation, doing business as Phoenix
Metals Company ("Phoenix"), a privately-held metals service center company
located in Norcross (Atlanta), Georgia, for $21 million in cash. Phoenix
operates as a wholly-owned subsidiary of the Company and has facilities in
Birmingham, Alabama; Tampa, Florida; and Charlotte, North Carolina; in addition
to its headquarters in Norcross. Phoenix's products include primarily
flat-rolled aluminum, stainless steel and coated steel. Phoenix's revenues for
the eleven months ended January 29, 1998, were approximately $119 million.
Also on January 30, 1998, the Company completed its acquisition of the
assets and business of Durrett-Sheppard Steel Co., L.L.C. and its subsidiary
Durrett-Sheppard Steel of Pennsylvania, Inc., through its newly-formed
subsidiary, Durrett Sheppard Steel Co., Inc. ("DSS"), a carbon steel metals
service center, for $30.5 million in cash. DSS is located in Baltimore,
Maryland, and operates as a wholly-owned subsidiary of the Company.
Durrett-Sheppard Steel Co., L.L.C.'s revenues for the twelve months ended
September 30, 1997, were approximately $47 million.
On December 1, 1997, the Company purchased all of the outstanding capital
stock of Georgia Steel Supply Company ("Georgia Steel"), a privately-held metals
service center located in Atlanta, Georgia. Georgia Steel primarily sells carbon
steel plate, bar and structurals, and operates as a wholly-owned subsidiary
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of Siskin Steel & Supply Company, Inc. ("Siskin"), a wholly-owned subsidiary of
the Company. This acquisition was funded by the 1997 equity offering. Georgia
Steel's net sales for the one month period ending December 31, 1997, were $1.5
million.
On October 1, 1997, the Company acquired 100% of the outstanding common
stock of Service Steel Aerospace Corp. ("SSA") for $26 million in cash. SSA, a
wholly-owned subsidiary of the Company, operates metals service centers in
Tacoma, Washington; North Canton, Ohio; and Long Beach, California. SSA
specializes in stainless and alloy specialty steel products for the aerospace
industry, thereby expanding the Company's position in this growing industry. The
acquisition of SSA was funded through the Company's bank line of credit, which
was subsequently paid off by the 1997 equity offering. SSA's net sales for the
three month period ending December 31, 1997, were $14 million.
On April 30, 1997, the Company purchased 100% of the outstanding shares of
Amalco Metals, Inc. ("Amalco"), a privately-held metals service center located
in the San Francisco area. Amalco specializes in precision cut aluminum plate
and sheet products. Upon the completion of a new, larger, state-of-the-art
facility in Union City, California, management plans to combine the business of
Amalco with the Company's existing metals service center division in Santa
Clara, California. The combination is scheduled to be completed in 1998. The
purchase of Amalco was funded with borrowings under the Company's revolving line
of credit, which was later replaced with the issuance of a private placement of
debt. Amalco's net sales for the eight months ended December 31, 1997, were $21
million.
On April 2, 1997, the Company completed the purchase of 100% of the
outstanding capital stock of AMI Metals, Inc. ("AMI") for $38.5 million in cash.
AMI was a privately-held company, operating metals service centers in Fontana,
California; Wichita, Kansas; Brentwood, Tennessee; Fort Worth, Texas; Kent,
Washington; and Swedesboro, New Jersey. AMI specializes in the processing and
distribution of aluminum plate, sheet and bar products primarily for the
aerospace industry. AMI operates as a wholly-owned subsidiary of the Company.
This acquisition was funded with borrowings under the Company's revolving line
of credit, which was later replaced with the issuance of a private placement of
debt. AMI's net sales for the nine months ended December 31, 1997, were $98
million.
The Company completed a public offering of 3,595,000 new shares of the
Company's Common Stock at $27.625 per share on November 4, 1997. This resulted
in net proceeds of approximately $94 million, which was used to pay down debt,
including the debt incurred to fund the acquisition of SSA, and to fund the
acquisitions of Georgia Steel, DSS and Phoenix.
The Company issued $65 million of senior unsecured notes in a private
placement of debt in September 1997. The notes are held by insurance companies,
and the proceeds were used to pay down outstanding debt, including debt incurred
to fund the acquisitions of AMI and Amalco. In January 1997, $75 million was
funded for the November 1996 private placement of debt. The proceeds of this
issuance were used to pay off the outstanding promissory notes issued for the
acquisition of Siskin and to pay down debt.
The Company also replaced its revolving line of credit with a new
syndicated credit facility, increasing the borrowing limit to $200 million.
Finally, the Company effected a 3:2 stock split in June 1997 in the form of a
50% stock dividend.
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RESULTS OF OPERATIONS
The following table sets forth certain income statement data for each of
the three years in the period ended December 31, 1997 (dollars are shown in
thousands and certain amounts may not calculate due to rounding):
1997 1996 1995
--------------------- --------------------- ---------------------
% OF % OF % OF
$ NET SALES $ NET SALES $ NET SALES
-------- --------- -------- --------- -------- ---------
Net sales.................. $961,518 100.0% $653,975 100.0% $561,341 100.0%
Gross profit............... 224,018 23.3 161,776 24.7 129,282 23.0
Operating expenses......... 164,580 17.1 118,089 18.0 94,609 16.9
Income from operations..... $ 59,438 6.2% $ 43,687 6.7% $ 34,673 6.1%
======== ===== ======== ===== ======== =========
FIFO income from
operations............... $ 61,380 6.4% $ 38,436 5.9% $ 43,721 7.8%
======== ===== ======== ===== ======== =========
Substantially all inventories for the Company's metals service centers have
been stated on the last-in, first-out ("LIFO") method. The Company uses the LIFO
method of inventory valuation for these inventories because it results in a
better matching of costs and revenues. Under the LIFO method, the effect of
suppliers' price increases or decreases is reflected directly in the cost of
goods sold. During periods of increasing prices, which the Company experienced
during 1997, LIFO accounting will cause reported income to be lower than would
otherwise result from the use of the first-in, first-out ("FIFO") method of
inventory valuation. The table above includes income from operations and the
discussions that follow include analysis as if the Company used the FIFO method.
This information is for supplementary purposes only in order to facilitate a
comparison of the Company's results of operations with those of other similar
companies who use the FIFO method.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 (DOLLAR
AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $307,543, or 47.0%, for the year 1997
compared to 1996, which reflects an increase in tons sold of 51.9% and a
decrease in the average selling price per ton of 2.7%. The increase in sales
volume during 1997 was primarily due to the inclusion of sales from CCC Steel,
Inc. ("CCC Steel"), which was acquired April 2, 1996; from Siskin, which was
acquired October 1, 1996; from AMI, which was acquired April 2, 1997; from
Amalco, which was acquired April 30, 1997; from SSA, which was acquired October
1, 1997; and from Georgia Steel, which was acquired December 1, 1997
(collectively, the "Acquisitions"). The average selling price for 1997 decreased
2.7% from the 1996 average selling price primarily due to, generally, a more
competitive market and supply in excess of demand for the electropolished
stainless steel tubing and fittings sold to the semiconductor manufacturing
industry. The selling prices of these products are significantly higher than
most other products sold by the Company, resulting in a decline in the overall
average selling price even though the quantities are a small percent of the
total. Excluding the sales of the Acquisitions, the Company reported a 9.8%
increase in tons sold, which is primarily due to general economic improvements
and an increased market share in the Company's market areas, and a 3.0% decrease
in the average selling price from 1997 to 1996 primarily due to reduced selling
prices of electropolished stainless steel tubing and fittings, as discussed
above.
Included in other income for 1997 is a net gain of $1,008 realized on the
sale of real property at the Santa Clara, California, location. Included in 1996
is a net gain of $1,519 realized on the sale of real property near Los Angeles,
California.
Total gross profit increased $62,242, or 38.5%, compared to 1996, due to
the additional gross profit generated by the Acquisitions. Expressed as a
percentage of sales, gross profit decreased to 23.3% for 1997, compared to 24.7%
in 1996. This decrease was primarily due to decreased selling prices of certain
of the Company's raw materials during 1997, from 1996 levels. During 1996, the
Company experienced declining raw material costs primarily for its common alloy
aluminum and stainless steel products, resulting in a net
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decrease in LIFO costs of $5,251. Although stainless steel costs continued to
decline in 1997, the significant increases in the costs of heat treated aluminum
products, along with the increased sales of these products during 1997, resulted
in a net increase in LIFO costs of $1,942. On a FIFO basis, gross profit in 1997
was 23.5% of sales, compared to 23.9% in 1996. The FIFO gross profit for the
metals service centers remained relatively constant, with a slight decrease due
to declining margins for electropolished stainless steel tubing and fittings
sold to the semiconductor manufacturing industry resulting from a more
competitive sales environment and increased customer demand for certain lower
margin products sold to the semiconductor manufacturing industry.
Warehouse, delivery, selling, and general and administrative expenses
increased $41,790, or 38.1%, for 1997 compared to 1996. These expenses
represented 15.8% and 16.8% of sales in 1997 and 1996, respectively. The dollar
increase in expenses reflects the increase in sales volume for the 1997 period,
which includes the sales and related operating expenses of the Acquisitions. The
decrease in expenses as a percentage of sales is primarily due to the $1,000
charge included in 1996 related to the termination of the Company's pension
plan, and due to the reductions in workforce and operating expenses at Valex
related to the slowdown in the semiconductor manufacturing industry.
Depreciation and amortization expense increased 55.5% for 1997 compared to
1996. The increase is primarily due to the inclusion of depreciation expense and
the amortization of goodwill related to the Acquisitions.
Income from operations increased 36.1% from $43,687 in 1996 to $59,438 in
1997. The increase was mainly attributable to the inclusion in 1997 of operating
income from the Acquisitions.
Interest expense increased $6,921 in 1997 compared to 1996 due to an
increase in the average debt outstanding to fund the Acquisitions.
The effective income tax rate of the Company increased from 39.9% in 1996
to 41.0% in 1997, mainly due to the increased non-deductible amortization of
goodwill from the Acquisitions.
Earnings per share, on a diluted basis, for 1997 and 1996 of $2.15 and
$1.90, respectively, includes $0.04 and $0.06 per share, respectively,
attributable to the sale of real property in each of those periods.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 (DOLLAR
AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)
Consolidated net sales increased $92,634, or 16.5%, for the year 1996
compared to 1995, reflecting an increase in tons sold of 52.0% and a decrease in
the average selling price per ton of 22.8%. These changes are primarily due to
additional sales volume and a change in product mix during 1996. The 1996 sales
include three months of net sales of Siskin (acquired October 1, 1996), nine
months of net sales of CCC Steel (acquired April 3, 1996), and twelve months of
net sales of the Los Angeles business received October 1, 1995, upon the
dissolution of Feralloy Reliance Company, L.P. ("FRLP"), a joint venture in
which the Company owned a 50% interest (collectively, the "1996 Acquisitions").
There was also an increase in sales of electropolished stainless steel tubing
due to the accelerated construction activities of the semiconductor
manufacturing industry in 1996 as compared to 1995. Substantially all of this
increase occurred in the first half of 1996, before a slowdown in these
construction activities began. The 1996 Acquisitions sell a significant volume
of carbon steel products, which generally have lower selling prices than other
products sold by the Company. The average selling prices decreased for all
products for the 1996 period compared to 1995, with the most significant
decreases in aluminum and stainless steel products. Excluding the 1996
Acquisitions, there was an increase in tons sold of 0.6% and a decrease in the
average sales price per ton of 2.6%.
Included in other income for 1996 is a gain of $1,519 realized on the sale
of the real estate at the Bralco Metals facility near Los Angeles, California.
Total gross profit increased $32,494, or 25.1%, compared to 1995. Expressed
as a percentage of sales, gross profit increased to 24.7% for 1996, compared to
23.0% in 1995. The increased sales volume, in the first six months of 1996, of
electropolished stainless steel tubing to the semiconductor manufacturing
industry, and
17
21
production efficiency gains realized from capital improvements for the
production of these products contributed to this increase in gross profit. In
addition, decreasing LIFO costs of the Company's raw materials, primarily for
common alloy aluminum and stainless steel products, resulted in increased gross
profit of $5,251 in 1996, compared to increased LIFO costs of raw materials in
1995, which decreased gross profit by $9,048 during 1996. On a FIFO basis, gross
profit in 1996 was 23.9% of sales, compared to 24.6% in 1995. The decline in
FIFO gross profit resulted primarily from declining selling prices for stainless
steel and aluminum products during 1996.
Warehouse, delivery, selling, and general and administrative expenses
increased $20,224, or 22.6%, for 1996 compared to 1995. These expenses
represented 16.8% and 15.9% of sales in 1996 and 1995, respectively. The dollar
increase in expenses reflects the increase in sales volume for the 1996 period,
which includes the operating expenses for Siskin, CCC Steel and the Los Angeles
service center received upon the dissolution of FRLP. The percentage increase
includes expenses (approximately $1,000) associated with terminating the
Company's defined benefit pension plan. During 1996, the Company implemented a
401(k) plan to replace its pension plan.
Income from operations increased 26% from $34,673 in 1995 to $43,687 in
1996. The increase was attributable to the decrease in the current inventory
replacement costs and increased gross profit on sales of electropolished
stainless steel tubing, as discussed above, and the inclusion of operating
income from the 1996 Acquisitions.
Interest expense increased $2,345 in 1996 compared to 1995 due to an
increase in the average debt outstanding during 1996. This increase was due to
funding the acquisitions of CCC Steel in April 1996 and Siskin in October 1996
through the Company's revolving credit agreement and issuance of promissory
notes in connection with the Siskin acquisition.
Equity in earnings from a 50%-owned company and joint venture increased
$2,141 in 1996 due to the acquisition of a 50% interest in American Steel,
L.L.C. ("American Steel") as of July 1, 1995, resulting in twelve months of
earnings included in 1996 compared to six months included in 1995. The increase
was also due to the dissolution of the FRLP joint venture in September 1995.
The effective income tax rate of the Company decreased from 41.2% in 1995
to 39.9% in 1996, mainly due to a decrease in the effective state tax rate
resulting from a change in the geographical sales mix.
Earnings per share for 1996 of $1.90 includes $0.06 per share attributable
to the sale of real estate, discussed above.
LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE
AND PER SHARE AMOUNTS)
At December 31, 1997, working capital amounted to $213,252, compared to
$136,765 at December 31, 1996. The increase in working capital is due to the
working capital of companies acquired during 1997, cash generated from
operations and proceeds from an equity offering. The Company's capital
requirements are primarily for working capital, acquisitions, and capital
expenditures for continued improvements in plant capacities and material
handling and processing equipment.
The Company's primary sources of liquidity are generally from internally
generated funds from operations and the Company's revolving line of credit. On
October 22, 1997, the Company entered into a syndicated credit facility with
five banks. The Company's borrowing limit under the revolving line of credit
established under this agreement was increased to $200,000. Prior to the
syndicated line of credit, the Company's line of credit with one lender had been
increased to $125,000 in March 1997. The syndicated credit agreement allows the
Company to use up to $175,000 of the line of credit to make acquisitions. On
October 22, 1997, the Company also entered into an agreement that allows the
Company to issue and have outstanding letters of credit in an amount not to
exceed $10,000.
In September 1997 and in November 1996, the Company entered into agreements
with insurance companies for private placements of debt in the aggregate amounts
of $65,000 and $75,000, respectively. The proceeds of the debt funded in
September 1997 were used to refinance the borrowings under the Company's
18
22
revolving credit facility made to fund the acquisitions of AMI and Amalco, and
borrowings for general working capital purposes. The proceeds of the debt funded
in January 1997 were used to pay off the $65,000 of promissory notes issued for
the acquisition of Siskin with the balance of $10,000 applied to reduce the
borrowings under the Company's revolving credit facility. The senior notes that
were issued in the private placements have maturity dates ranging from 2002 to
2009 and bear interest at rates ranging from 6.76% to 7.37% per annum.
In November 1997, the Company issued 3,595,000 new shares of its Common
Stock in a public equity offering, resulting in net proceeds of $93,908. The
proceeds from this offering were used to pay down outstanding bank debt,
including the debt incurred to fund the acquisition of SSA, and to fund the
acquisition of Georgia Steel. At December 31, 1997, the balance of the proceeds
was invested in high quality short-term investments (classified as cash
equivalents), which, along with bank debt, was then used to fund the
acquisitions of DSS and Phoenix on January 30, 1998.
Net capital expenditures, excluding acquisitions, were $26,561 for the 1997
year. The Company had no material commitments for capital expenditures as of
December 31, 1997. The Company anticipates that the funds generated from
operations and funds available under its line of credit will be sufficient to
meet its working capital needs for the foreseeable future, including the
expansion of its facilities at certain of its metals service centers currently
in progress.
In December 1994, the Board of Directors approved a Stock Repurchase Plan
authorizing the Company to purchase up to 750,000 shares (increased to 1,500,000
in February 1995) of its outstanding Common Stock. The Company had purchased a
total of 1,350,750 shares of its Common Stock, at an average purchase price of
$11.37 per share as of December 31, 1997, all of which are being treated as
authorized but unissued shares. The Company repurchased 373,050 of those shares
during 1997, at an average purchase price of $19.88 per share. The Company
believes such purchases enhance shareholder value and reflect its confidence in
the long-term growth potential of the Company.
INFLATION
The Company's operations have not been, nor are they expected to be,
materially affected by general inflation. Historically, the Company has been
successful in raising prices to its customers in periods of increasing metal
prices and has had to reduce prices to its customers in periods of declining
metal prices. Changes in metal prices, therefore, affect the Company's sales and
earnings.
SEASONALITY
The Company recognizes that some of its customers may be in seasonal
businesses, especially customers in the construction industry. As a result of
the Company's geographic, product and customer diversity, however, the Company's
operations have not shown any material seasonal trends, although the months of
November and December traditionally have been less profitable because of a
reduced number of working days for shipments of the Company's products and
holiday closures for some of its customers. There can be no assurance 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.
IMPACT OF YEAR 2000
The Company does not anticipate that there would be a material impact on
the results of operations or cash flows of the Company related to the Year 2000
Issue. The Year 2000 Issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than the year
2000. Most of the Company's locations are converting to a new computer system
that has been certified Year 2000 compliant by the Company's software vendor. In
addition to the vendor's certification, the Company has an ongoing program to
test its systems for such compliance. This conversion began in 1994 and has been
progressing on schedule. The final conversions are scheduled to occur in June
1999, which is prior to any anticipated impact on its operating systems. A
training staff was hired in 1996 and has been solely dedicated to this
conversion project. At the Company's locations that are not being converted to
this system,
19
23
assessments of the existing systems have occurred. The Company, working with its
respective software vendors, has adopted plans to make the minor modifications
required to address the Year 2000 Issue at these locations. The major business
systems of the Company are not vulnerable to third parties' failure to remediate
their own Year 2000 Issues, as the Company's interface with third parties,
including customers and vendors, does not involve heavily automated computer
dependent communications. The Company believes that with the conversions to new
software and modifications to existing software, the Year 2000 Issue will not
pose significant operational problems for its computer system. In the event the
remaining conversions and modifications are not made, or are not completed
timely, the Year 2000 Issue is not expected to have a material impact on the
operations of the Company, as the products sold by the Company and the
processing and delivery equipment used are not date dependent, minimizing the
impact of any Year 2000 Issues related to meeting customer requirements.
As the Company has been incurring costs related to this project since 1994
and no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations or cash flows related
to the Year 2000 Issue.
20
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RELIANCE STEEL & ALUMINUM CO.
AUDITED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Auditors.............................. 22
Consolidated Balance Sheets at December 31, 1997 and 1996... 23
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................... 24
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.............. 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... 26
Notes to Consolidated Financial Statements.................. 28
21
25
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Reliance Steel & Aluminum Co.
We have audited the accompanying consolidated balance sheets of Reliance
Steel & Aluminum Co. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reliance Steel
& Aluminum Co. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presented fairly, in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Long Beach, California
February 9, 1998
22
26
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 34,047 $ 815
Accounts receivable, less allowance for doubtful accounts
of $4,343 in 1997 and $2,899 in 1996................... 117,733 73,092
Inventories............................................... 158,736 122,778
Prepaid expenses and other current assets................. 2,472 6,700
Deferred income taxes..................................... 9,086 7,515
-------- --------
Total current assets........................................ 322,074 210,900
Property, plant and equipment, at cost:
Land...................................................... 26,348 21,054
Buildings................................................. 95,424 80,687
Machinery and equipment................................... 104,064 88,551
Allowances for depreciation............................... (64,872) (56,678)
-------- --------
160,964 133,614
Investment in 50%-owned company............................. 28,760 28,958
Goodwill.................................................... 67,258 16,235
Other assets................................................ 4,810 1,469
-------- --------
Total assets................................................ $583,866 $391,176
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 82,947 $ 50,274
Accrued expenses.......................................... 8,969 9,183
Wages and related accruals................................ 7,658 4,636
Deferred income taxes..................................... 9,148 7,587
Current maturities of long-term debt...................... 100 2,455
-------- --------
Total current liabilities................................... 108,822 74,135
Long-term debt.............................................. 143,350 107,450
Deferred income taxes....................................... 18,530 16,949
Commitments................................................. -- --
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 5,000,000
None issued or outstanding............................. -- --
Common stock, no par value:
Authorized shares -- 20,000,000
Issued and outstanding shares 18,831,458 in 1997 and
15,489,430 in 1996, stated capital.................... 154,761 61,131
Retained earnings......................................... 158,403 131,511
-------- --------
Total shareholders' equity.................................. 313,164 192,642
-------- --------
Total liabilities and shareholders' equity.................. $583,866 $391,176
======== ========
See accompanying notes.
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27
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Net sales........................................... $ 961,518 $ 653,975 $ 561,341
Gain on sale of real estate......................... 1,008 1,519 --
Other income........................................ 2,603 2,945 2,318
----------- ----------- -----------
965,129 658,439 563,659
Costs and expenses:
Cost of sales..................................... 737,500 492,199 432,059
Warehouse, delivery, selling, administrative and
general........................................ 151,415 109,625 89,401
Depreciation and amortization..................... 13,165 8,464 5,208
Interest.......................................... 10,861 3,940 1,595
----------- ----------- -----------
912,941 614,228 528,263
----------- ----------- -----------
Income before equity in earnings of 50%-owned
company and joint venture and income taxes........ 52,188 44,211 35,396
Equity in earnings of 50%-owned company and joint
venture........................................... 5,798 5,340 3,199
----------- ----------- -----------
Income before income taxes.......................... 57,986 49,551 38,595
Income taxes........................................ 23,810 19,761 15,893
----------- ----------- -----------
Net income.......................................... $ 34,176 $ 29,790 $ 22,702
=========== =========== ===========
Earnings per share -- Diluted....................... $ 2.15 $ 1.90 $ 1.45
=========== =========== ===========
Weighted average shares outstanding -- Diluted...... 15,874,684 15,679,963 15,591,258
=========== =========== ===========
Earnings per share -- Basic......................... $ 2.17 $ 1.93 $ 1.46
=========== =========== ===========
Weighted average shares outstanding -- Basic........ 15,736,241 15,460,009 15,520,179
=========== =========== ===========
See accompanying notes.
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28
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS
---------- -------- --------
Balance at January 1, 1995.................................. 16,296,954 $ 63,573 $ 86,410
Net income for the year................................... -- -- 22,702
Stock options exercised................................... 17,250 106 --
Stock issued under incentive bonus plan................... 35,206 311 --
Cash dividends -- $.10 per share.......................... -- -- (1,556)
Repurchase of stock....................................... (940,950) (3,646) (3,983)
---------- -------- --------
Balance at December 31, 1995................................ 15,408,460 60,344 103,573
Net income for the year................................... -- -- 29,790
Stock options exercised................................... 56,110 404 --
Stock issued under incentive bonus plan................... 24,860 383 --
Cash dividends -- $.12 per share.......................... -- -- (1,852)
---------- -------- --------
Balance at December 31, 1996................................ 15,489,430 61,131 131,511
Net income for the year................................... -- -- 34,176
Stock options exercised................................... 97,900 787 1,243
Stock issued under incentive bonus plan................... 22,178 449 --
Cash dividends -- $.16 per share.......................... -- -- (2,605)
Repurchase of stock....................................... (373,050) (1,514) (5,922)
Issuance of stock, net of offering costs of $371.......... 3,595,000 93,908 --
---------- -------- --------
Balance at December 31, 1997................................ 18,831,458 $154,761 $158,403
========== ======== ========
See accompanying notes.
25
29
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- --------
OPERATING ACTIVITIES
Net income................................................. $ 34,176 $ 29,790 $ 22,702
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 13,165 8,464 5,208
Deferred taxes........................................... 1,299 1,535 (1,777)
(Gain) losses on sales of equipment...................... (265) 459 387
Net gain on sale of real estate.......................... (1,008) (1,519) --
Equity in earnings of 50%-owned company and joint
venture............................................... (5,109) (4,823) (3,199)
Changes in operating assets and liabilities:
Accounts receivable................................... (16,302) 16,445 (32)
Inventories........................................... 548 (6,687) (3,175)
Prepaid expenses and other assets..................... 1,075 3,625 1,343
Accounts payable and accrued expenses................. 12,179 (10,863) 17,898
--------- --------- --------
Net cash provided by operating activities.................. 39,758 36,426 39,355
INVESTMENT ACTIVITIES
Purchases of property, plant and equipment................. (26,561) (21,395) (7,867)
Proceeds from sales of equipment........................... 3,276 1,082 68
Acquisitions of metals service centers..................... (80,514) (95,909) --
Purchase of a 50%-owned company............................ -- -- (19,250)
Dividends received from 50%-owned company.................. 5,307 1,426 1,405
Proceeds from the sale of certain assets of a metals
service center........................................... -- -- 4,200
--------- --------- --------
Net cash used in investing activities...................... (98,492) (114,796) (21,444)
FINANCING ACTIVITIES
Proceeds from borrowings................................... 256,000 105,273 32,097
Principal payments on long-term debt and short-term
borrowings............................................... (250,380) (43,035) (31,571)
Dividends paid............................................. (2,605) (1,852) (1,556)
Issuance of common stock................................... 95,144 787 417
Exercise of stock options.................................. 1,243 -- --
Repurchase of common stock................................. (7,436) -- (7,629)
--------- --------- --------
Net cash provided by (used in) financing activities........ 91,966 61,173 (8,242)
--------- --------- --------
Increase (decrease) in cash and cash equivalents........... 33,232 (17,197) 9,669
Cash and cash equivalents at beginning of year............. 815 18,012 8,343
--------- --------- --------
Cash and cash equivalents at end of year................... $ 34,047 $ 815 $ 18,012
========= ========= ========
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30
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
During 1997, certain assets of the Company were exchanged in non-monetary
transactions. The asset values exchanged were approximately $1,900 and $1,200,
respectively. During 1995, certain assets of the Company were exchanged in a
non-monetary transaction. The asset value exchanged was approximately $4,305.
Additionally, the Company's 50% interest in American Metals Corporation was
contributed to American Steel, L.L.C., of which the Company owns 50%, during
1995.
Effective at the close of business on September 30, 1995, the Company
received the following assets and liabilities upon the dissolution of the
Feralloy Reliance Company, L.P. joint venture:
Inventory.................................................. $19,678
Accounts receivable........................................ 11,666
Fixed assets............................................... 2,567
Other assets............................................... 159
Liabilities................................................ 4,881
Note payable............................................... 21,400
See accompanying notes.
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31
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Reliance Steel & Aluminum Co. and its wholly-owned subsidiaries, which include
AMI Metals, Inc., Amalco Metals, Inc., CCC Steel, Inc., MetalCenter, Inc.,
Service Steel Aerospace Corp., and Siskin Steel & Supply Company, Inc.
(including Georgia Steel Supply Company), and 97%-owned Valex Corp., on a
consolidated basis ("the Company"). All significant intercompany transactions
have been eliminated in consolidation. The Company accounts for its 50%
investment in American Steel, L.L.C. on the equity method of accounting.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Business
The Company operates a metals service center network of 51 processing and
distribution facilities (not including American Steel, L.L.C.) within 20 states,
which provide value-added metals processing services and distribute a full line
of more than 60,000 metal products.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables. The
Company sells its products to a geographically diverse customer base in various
industries. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent in the industry and no collateral
required. Losses from credit sales are provided for in the financial statements
and consistently have been within the allowance provided.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the consolidated
financial statements.
Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Included
in cash and cash equivalents at December 31, 1997, is $31,777,000, at fair
value, of commercial paper, which is classified as available-for-sale. Cash and
cash equivalents are held by major financial institutions.
Inventories
Substantially all inventories of the Company have been stated on the
last-in, first-out ("LIFO") method, which is not in excess of market. The
Company uses the LIFO method of inventory valuation because it results in a
better matching of costs and revenues. At December 31, 1997 and 1996,
inventories would have
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32
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been $27,254,000 and $25,312,000 higher, respectively, had the first-in,
first-out ("FIFO") method been used. Inventories of AMI Metals, Inc. were
$16,362,000 at December 31, 1997, and inventories of Valex Corp. were
$10,869,000 and $19,130,000 at December 31, 1997 and 1996, respectively, and are
stated on the FIFO method, which is not in excess of market.
Depreciation
The provision for depreciation of property, plant and equipment is
generally computed on the straight-line method at rates designed to distribute
the cost of assets over the useful lives, estimated as follows:
31 1/2
Buildings................................................ years
Machinery and equipment.................................. 3-10 years
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns.
Stock-Based Compensation
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB25"), "Accounting for Stock
Issued to Employees" and related interpretations. Under the provisions of APB25,
compensation expense is measured at the grant date for the difference between
the fair value of the stock and the exercise price. The Company has not granted
stock options at less than the fair value of the stock at the date of grant.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information, which is effective for financial statements for periods beginning
after December 15, 1997. The Company will be required to report financial and
descriptive information about its reportable operating segments. The Company
believes there will be no impact on its financial statements due to the adoption
of Statement 131.
In June 1997, the FASB also issued Statement No. 130, Reporting
Comprehensive Income, which is effective for financial statements for periods
beginning after December 15, 1997. This Statement establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. The Company does not anticipate any impact on its
financial statements due to the adoption of Statement 130.
2. ACQUISITIONS
Effective December 1, 1997, the Company purchased 100% of the outstanding
common stock of Georgia Steel Supply Company ("Georgia Steel"), a privately-held
metals service center in Atlanta, Georgia. This purchase was funded with the
proceeds of a public equity offering issued in November 1997. Georgia Steel
operates as a wholly-owned subsidiary of Siskin Steel & Supply Company, Inc.
("Siskin").
Effective October 1, 1997, the Company acquired 100% of the outstanding
common stock of Service Steel Aerospace Corp. ("SSA") for $26,000,000. SSA
operates metals service centers in Tacoma, Washington; North Canton, Ohio; and
Long Beach, California. The purchase of SSA was funded by drawing on the
Company's line of credit, which was paid off with proceeds from the public
equity offering in November 1997.
29
33
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective April 30, 1997, the Company purchased 100% of the outstanding
shares of Amalco Metals, Inc. ("Amalco"), a privately-held metals service center
located in Union City, California. This purchase was funded by drawings on the
Company's revolving line of credit, which was later replaced with the issuance
of a private placement debt. Amalco is expected to be merged with Reliance in
1998, when it is relocated to a new facility.
Effective April 2, 1997, the Company acquired 100% of the outstanding
capital stock of AMI Metals, Inc. ("AMI") for $38,500,000. AMI operates metals
service centers and is headquartered in Brentwood, Tennessee, with additional
locations in Fontana, California; Wichita, Kansas; Fort Worth, Texas; Kent,
Washington; and Swedesboro, New Jersey. The purchase of AMI was funded by
drawings on the Company's revolving line of credit, which was later replaced
with the issuance of a private placement debt.
Effective October 1, 1996, the Company purchased 100% of the outstanding
capital stock of Siskin for $71,000,000. Siskin was a privately-held metals
service center in the Southeastern United States, with locations in Chattanooga
and Nashville, Tennessee; Spartanburg, South Carolina; and Birmingham, Alabama.
The purchase of Siskin was funded by drawing $6,000,000 on the Company's
revolving line of credit and issuing $65,000,000 of promissory notes. The
promissory notes were redeemed on January 2, 1997, from the proceeds of a
private placement of debt of $75,000,000.
Effective April 3, 1996, the Company purchased 100% of the outstanding
capital stock of CCC Steel, Inc. ("CCC Steel") for approximately $25,000,000 in
cash. CCC Steel was a privately-held carbon steel service center, with
facilities in Los Angeles, California, and Salt Lake City, Utah. The purchase
was funded through the Company's revolving line of credit.
These purchases were accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the date of
the acquisition. The excess of purchase price over the estimated fair values of
the net assets acquired of $13,598,000, $2,155,000, $23,949,000, $4,205,000,
$19,427,000 and $5,333,000 for CCC Steel, Siskin, AMI, Amalco, SSA, and Georgia
Steel, respectively, has been recorded as goodwill. Related amortization expense
amounted to approximately $1,468,000 and $300,000 for the years ended December
31, 1997 and 1996, respectively.
The operating results of these acquisitions are included in the Company's
consolidated results of operations from the date of each acquisition. The
following unaudited proforma summary presents the consolidated results of
operations as if the acquisitions had occurred at the beginning of each period
after the effect of certain adjustments, including amortization of goodwill,
interest expense on the acquisition debt, and related income tax effects. These
proforma results have been presented for comparative purposes only and are not
indicative of what would have occurred had the acquisition been made as of
January 1, 1996 or 1997, appropriately, or of any potential results which may
occur in the future.
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Proforma:
Net sales................................. $1,053,239 $946,523 $767,401
Net income................................ 36,841 31,500 26,393
Earnings per share........................ 2.32 2.01 1.96
3. INVESTMENTS IN 50%-OWNED COMPANY AND JOINT VENTURE
On July 1, 1995, the Company acquired a 50% interest in the Membership
Units of American Steel, L.L.C. ("American Steel"), a newly-formed company, for
$19,250,000 in cash. American Steel is owned 50%
30
34
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each by American Industries, Inc. ("American") and the Company and includes
American's former metals service centers in Portland, Oregon and Kent (Seattle),
Washington. At the date of acquisition, American Steel also owned a metals
service center in Vancouver, British Columbia, which was sold in January 1997.
Additionally, American and the Company each contributed their 50% interests in
American Metals Corporation ("American Metals"), a joint venture created in 1993
between the Company and American, to American Steel. American Metals consists of
three metals service centers in California. The Operating Agreement provides
that the Company may purchase the remaining 50% of American Steel during a term
of three years following the earlier of the death of the owner of American, or
December 31, 2005. The price shall be the greater of American's current Capital
Account or 50% of the fair market value of American Steel. The Operating
Agreement gives the Company complete control over the assets and operations of
American Steel. Summarized financial information for American Steel, accounted
for by the equity method, is as follows as of and for the twelve months ended:
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
Current assets........................................... $54,982 $46,462
Property, plant, and equipment and other assets.......... 46,840 48,373
Total assets............................................. 101,822 94,835
Current liabilities...................................... 11,892 9,553
Long-term liabilities.................................... 3,078 3,319
Net sales................................................ 183,717 178,882
Gross profit............................................. 46,846 45,055
Income before income taxes............................... 11,138 10,281
Net income............................................... 9,747 9,247
At the close of business on September 30, 1995, the Company completed an
agreement with Feralloy Corporation to terminate their joint venture, Feralloy
Reliance Company, L. P. ("FRLP"). This transaction did not have a material
effect on the financial position or results of operations of the Company.
4. GOODWILL AND OTHER ASSETS
Goodwill, representing the excess of the purchase price over the fair
values of the net assets of acquired entities, is being amortized over the
period of expected benefit of 40 years. Other intangible assets are being
amortized over the period of expected benefit, generally five years.
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
Goodwill................................................. $70,648 $17,724
Covenants not to compete and other intangible assets..... 5,645 1,818
Less accumulated amortization............................ (4,998) (2,248)
------- -------
Total.................................................... $71,295 $17,294
======= =======
31
35
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Revolving line of credit ($200,000,000 limit) due
October 22, 2002, interest at variable rates......... $ -- $ --
Revolving line of credit ($125,000,000 limit).......... -- 39,000
Senior unsecured notes due January 2, 2004 to January
2, 2009, average interest rate 7.22%................. 75,000 --
Senior unsecured notes due January 2, 2002 to January
2, 2008, average interest rate 7.02%................. 65,000 --
Promissory notes, paid January 2, 1997................. -- 65,000
Variable Rate Demand Industrial Development Revenue
Bonds, Series 1989 A, due July 1, 2014, with interest
payable quarterly; average interest rate during 1997
of 3.5%.............................................. 3,450 3,550
9% Senior Notes, paid March 1, 1997.................... -- 1,800
Revolving line of credit ($10,000,000 limit), paid
February 28, 1997.................................... -- 555
-------- --------
143,450 109,905
Less amounts due within one year....................... (100) (2,455)
-------- --------
$143,350 $107,450
======== ========
In October 1997, the Company entered into a syndicated credit agreement
with five banks. This syndicated credit facility replaced the Company's existing
revolving line of credit, increasing the Company's borrowing limit to
$200,000,000. Prior to the syndicated line of credit, the Company's borrowing
limit with one lender had been increased during March 1997 to $125,000,000. In
October 1997, the Company also entered into a credit agreement that allows the
Company to issue and have outstanding up to $10,000,000 of letters of credit. In
September 1997 and November 1996, the Company entered into agreements with
insurance companies for private placements of debt in the aggregated amounts of
$65,000,000 and $75,000,000, respectively. The proceeds of the debt funded in
September 1997 were used to refinance the borrowings under the Company's
revolving credit facility made to fund the acquisitions of AMI and Amalco, along
with borrowings for general working capital purposes. The proceeds of the debt
funded in January 1997 were used to pay off $65,000,000 of promissory notes
issued for the acquisition of Siskin, with the balance of $10,000,000 applied to
reduce borrowings under the Company's revolving line of credit.
The Company's long-term loan agreements require the maintenance of a
minimum net worth and include certain restrictions on the amount of cash
dividends payable, among other things.
Interest paid during 1997, 1996, and 1995 amounted to $12,079,000,
$2,550,000, and $1,434,000, respectively. The syndicated credit facility
includes a commitment fee of 0.125%.
32
36
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of aggregate maturities of long-term debt for
each of the next five years (in thousands):
1998.............................. $ 100
1999.............................. 100
2000.............................. 100
2001.............................. 100
2002.............................. 10,100
Thereafter........................ 132,950
--------
$143,450
========
6. STOCK OPTION PLANS
During 1989, the Company adopted a Non-Qualified Stock Option Plan that
provided for the granting of options to key employees to purchase up to 630,000
shares of the Company's Common Stock at a price at least equal to the fair
market value of the stock at the grant date. The Plan expired on December 31,
1993. No options were exercisable until after one year from the grant date, and
in each of the following four years, 25% of the options became exercisable on a
cumulative basis. Options were exercisable for a period of five years from the
date of grant. All options outstanding under the 1989 Plan expired during 1997.
Transactions under this plan were as follows:
WEIGHTED AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE
------------- ------- ----------------
Outstanding at January 1, 1995..................... 170,886 $7.08
Granted.......................................... -- --
Exercised........................................ (17,250) $6.13
Expired.......................................... (4,725) $7.19
------- -----
Outstanding at December 31, 1995................... 148,911 $7.19
Granted.......................................... -- --
Exercised........................................ (56,110) $7.19
Expired.......................................... (4,725) $7.19
------- -----
Outstanding at December 31, 1996................... 88,076 $7.19
Granted.......................................... -- --
Exercised........................................ (81,776) $7.19
Expired.......................................... (6,300) $7.19
------- -----
Outstanding at December 31, 1997................... -- $ --
======= =====
In 1994, the Board of Directors of the Company adopted an Incentive and
Non-Qualified Stock Option Plan (the "1994 Plan"). There are 1,125,000 shares of
Common Stock reserved for issuance under the 1994 Plan. The 1994 Plan provides
for granting of stock options that may be either "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986 (the
"Code") or "non-qualified stock options," which do not satisfy the provisions of
Section 422A of the Code. Options are required to be granted at an option price
per share equal to the fair market value of Common Stock on the date of grant,
except that the exercise price of incentive stock options granted to any
employee who owns (or, under pertinent Code provisions, is deemed to own) more
than 10% of the outstanding Common Stock of the Company, must equal at least
110% of fair market value on the date of grant. Stock options may not be granted
longer than 10 years from the date of the 1994 Plan. All options granted have
five year terms and vest at the rate of 25% per year, commencing one year from
the date of grant.
33
37
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 23, 1997, and September 25, 1997, options to purchase 28,500 and
54,000 shares, respectively, of the Company's Common Stock were granted at
$12.67 and $29.25 per share, respectively, under the 1994 Plan. On January 24,
1996, non-qualified stock options to purchase 332,250 shares of the Company's
Common Stock at $12.17 per share were granted under the 1994 Plan. No options
were granted during 1995 or 1994. Transactions under this plan are as follows:
WEIGHTED AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE
------------- ------- ----------------
Outstanding at January 1, 1996..................... -- --
Granted....................................... 332,250 $12.17
Exercised..................................... -- --
Expired....................................... -- --
Outstanding at December 31, 1996................. 332,250 $12.17
Granted....................................... 82,500 $23.52
Exercised..................................... (16,375) $12.17
Expired....................................... (44,625) $12.17
------- ------
Outstanding at December 31, 1997................. 353,750 $14.82
======= ======
The following tabulation summarizes certain information concerning
outstanding and exercisable options at December 31, 1997:
PRICE RANGE
------------------------------
$12.17 $12.67 $29.25
-------- ------- -------
Outstanding options:
Number outstanding......................... 271,250 28,500 54,000
Weighted average exercise price............ $ 12.17 $ 12.67 $ 29.25
Weighted average remaining contractual life
in years................................ 3.1 4.1 4.75
Exercisable options:
Number exercisable......................... 55,531 -- --
Weighted average exercise price............ $ 12.17 $ 12.67 $ 29.25
There were no exercisable options outstanding in fiscal years 1996 and 1995
under the 1994 Plan.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by Statement of
Financial Accounting Standards No. 123, net income and earnings per share would
have been reduced to the pro forma amounts shown below:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Pro forma:
Net income........................................... $33,803 $29,584
Earnings per share:
Basic............................................. $ 2.15 $ 1.91
Diluted........................................... $ 2.13 $ 1.89
34
38
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model using the following weighted
average assumptions:
1997 1996
---- ----
Risk free interest rate..................................... 6.00% 6.50%
Expected life in years...................................... 4 4
Expected volatility......................................... 0.37% 0.37%
Expected dividend yield..................................... 0.20% 0.20%
7. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Accrued expenses not currently deductible for tax.... $ 6,186 $ 5,128
Unicap............................................... 567 783
Bad debt............................................. 1,647 1,159
Goodwill............................................. 686 445
-------- --------
Total deferred tax assets.................... 9,086 7,515
-------- --------
Deferred tax liabilities:
Tax over book depreciation........................... 11,311 9,030
Book basis in excess of tax basis on:
Inventory acquired................................ 7,906 7,574
Property, plant and equipment acquired............ 8,044 7,919
Other, net........................................... 417 13
-------- --------
Total deferred tax liabilities............... 27,678 24,536
-------- --------
Net deferred (liabilities) assets...................... $(18,592) $(17,021)
======== ========
35
39
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Current:
Federal..................................... $17,927 $14,598 $13,824
State....................................... 4,584 3,628 3,846
------- ------- -------
22,511 18,226 17,670
Deferred:
Federal..................................... 1,269 1,232 (1,652)
State....................................... 30 303 (125)
------- ------- -------
1,299 1,535 (1,777)
------- ------- -------
$23,810 $19,761 $15,893
======= ======= =======
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
Income tax at U.S. statutory tax rates................. 35.0% 35.0% 35.0%
State income tax, net of federal tax effect............ 5.0% 5.0 5.6
Other.................................................. 1.0% (.1) .6
---- ---- ----
Effective tax rate..................................... 41.0% 39.9% 41.2%
==== ==== ====
Income tax payments during 1997, 1996, and 1995 were $20,551,000,
$22,922,000 and $13,871,000, respectively.
8. SHAREHOLDERS' EQUITY
In November 1997, the Company issued 3,595,000 new shares at an offering
price of $27.625 per share in a secondary public offering. The proceeds of
$93,908 (net of underwriter commissions and offering costs) were used to pay
down bank debt, to fund the acquisition of Georgia Steel, and to fund a portion
of the acquisitions of DSS and Phoenix.
In December 1994, the Board of Directors approved a stock repurchase plan,
authorizing the Company to purchase up to 750,000 shares of its Common Stock
from time to time in the open market or in privately-negotiated transactions.
Repurchased shares are redeemed and treated as authorized but unissued shares.
In February 1995, the Board of Directors authorized the Company to purchase up
to an additional 750,000 shares. As of December 31, 1997, the Company had
repurchased a total of 1,350,750 shares of its Common Stock at an average cost
of $11.37 per share. The Company repurchased 373,050 of those shares during 1997
at an average purchase price of $19.88 per share.
9. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented
36
40
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and, where appropriate, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Numerator:
Net income.................................. $34,176 $29,790 $22,702
======= ======= =======
Denominator:
Denominator for basic earnings per share --
weighted average shares.................. 15,736 15,460 15,520
======= ======= =======
Effect of dilutive securities:
Employee stock options...................... 139 220 71
------- ------- -------
Denominator for dilutive earnings per
share -- adjusted weighted average shares
and assumed conversions.................. 15,875 15,680 15,591
======= ======= =======
Basic earnings per share...................... $ 2.17 $ 1.93 $ 1.46
======= ======= =======
Diluted earnings per share.................... $ 2.15 $ 1.90 $ 1.45
======= ======= =======
All weighted shares and per-share amounts have been adjusted for the 3:2
common stock split that occurred in June 1997.
10. LEASES
The Company leases land and buildings under noncancelable operating leases
expiring in various years through 2001. Several of the leases have renewal
options providing for additional lease periods. Future minimum payments, by year
and in the aggregate, under the noncancelable leases with initial or remaining
terms of one year or more, consisted of the following at December 31, 1997 (in
thousands):
1998............................... $ 4,747
1999............................... 3,032
2000............................... 2,558
2001............................... 2,097
2002............................... 1,845
Thereafter......................... 2,328
-------
$16,607
=======
Total rental expense amounted to $6,228,000, $3,858,000, and $2,099,000 for
1997, 1996, and 1995, respectively.
11. EMPLOYEE BENEFITS
The Company has an employee stock ownership plan ("the ESOP") and trust
that has been approved by the Internal Revenue Service as a qualified plan. The
ESOP is a noncontributory plan that covers salaried and certain hourly employees
of the Company. The amount of the annual contribution is at the discretion of
the Board of Directors of the Company, except that the minimum amount must be
sufficient to enable the ESOP Trust to meet its current obligations.
37
41
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had a noncontributory defined benefit pension plan covering
salaried and certain hourly employees of the Company, which was terminated in
February 1997. Benefits were based upon the employees' earnings. The annual
contribution was based upon the minimum funding requirement under Section 412 of
the Internal Revenue Code. There was no past service liability in connection
with the pension plan. The assets of the pension plan consisted primarily of
investments in short-term money market funds, common stock of publicly traded
companies, and the Company's Common Stock. On July 5, 1996, benefits under the
pension plan were frozen, as the Company elected to replace the pension plan
with a 401(k) plan. During 1996, the Company recorded an additional net pension
expense of approximately $1,000,000 related to termination of the plan. The
Board of Directors of the Company approved the termination of the pension plan
in February 1997. Distributions under the pension plan were made in 1997.
The net periodic pension costs for the plan were as follows:
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------ ----
(IN THOUSANDS)
Service costs -- benefits earned during the year............ $ 308 $443
Interest cost on projected benefit obligation............... 525 444
Actual return on assets..................................... (949) (752)
Net amortization and deferral............................... 573 444
Curtailment/termination expense............................. 1,000 --
------ ----
$1,457 $579
====== ====
The following is a summary of the status of the funding of the pension
plan:
DECEMBER 31,
------------
1996
----
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligations................................ $4,458
Non-vested benefit obligations............................ 448
------
Accumulated benefit obligations............................. $4,906
======
Projected benefit obligations............................... $4,906
Assets of the plan at market................................ 5,899
------
Excess of plan assets over projected benefit obligation..... 993
Unrecognized net loss....................................... (109)
Reserve for curtailment/termination......................... (884)
------
Accrued pension liabilities................................. $ --
======
Effective January 1996, the Company adopted a Supplemental Executive
Retirement Plan ("SERP"), which is a nonqualified pension plan that provides
post-retirement benefits to key officers of the Company. The SERP is
administered by the Compensation and Stock Option Committee of the Board of
Directors. Benefits are based upon the employees' earnings. Life insurance
policies were purchased for most individuals covered by the SERP and are funded
by the Company.
38
42
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net periodic pension cost for the plan was as follows:
YEAR ENDED
DECEMBER 31,
--------------
1997 1996
----- -----
(IN THOUSANDS)
Service costs -- benefits earned during the year............ $142 $148
Interest cost on projected benefit obligation............... 147 191
Amortization of unrecognized prior service cost............. 196 196
Net asset gain or (loss) deferred........................... (61) --
---- ----
$424 $535
==== ====
The following is a summary of the status of the funding of the SERP plan:
DECEMBER 31,
----------------
1997 1996
------ ------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligations............................... $1,253 $1,866
Non-vested benefit obligations........................... 86 18
Additional benefits based on estimated future salary
levels................................................ 908 999
------ ------
Accumulated benefit obligations............................ $2,247 $2,883
====== ======
Projected benefit obligations.............................. $2,247 $2,883
Assets of the plan at market............................... -- --
Unfunded projected benefit obligation...................... 2,247 2,883
Unrecognized net gain...................................... 786 --
Prior service cost......................................... (2,152) (2,348)
Additional liability....................................... 458 1,349
------ ------
Accrued pension liabilities................................ $1,339 $1,884
====== ======
In determining the actuarial present value of projected benefit obligations
for the Company's SERP at December 31, 1997 and 1996, the Company assumed a
discount rate of 7.5%, and an increase in annual future compensation levels of
6.0%.
The Company's contribution expense for Company sponsored retirement plans
were as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Pension Plan..................................... $ -- $1,457 $ 579
Employee Stock Ownership Plan.................... 800 600 600
401(k) Plans..................................... 972 546 100
Supplemental Executive Retirement Plan........... 644 575 --
------ ------ ------
$2,416 $3,178 $1,279
====== ====== ======
The Company participates in various multi-employer pension plans covering
certain employees not covered under the Company's benefit plans pursuant to
agreements between the Company and collective bargaining units who are members
of such plans. The Company is unable to determine its relative position with
regard to defined benefit plans to which contributions are made as a result of
collective bargaining agreements.
39
43
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a "Key-Man Incentive Plan" (the "Incentive Plan") for
division managers and officers, which is administered by the Compensation and
Stock Option Committee of the Board of Directors. For 1997, 1996, and 1995 this
incentive compensation bonus was payable 75% in cash and 25% in the Company's
Common Stock, with the exception of the 1997 bonus to officers, which may be
paid 100% in cash at the discretion of the individual. The Company accrued
$1,797,000, $1,763,000, and $1,533,000 under the Incentive Plan as of December
31, 1997, 1996, and 1995, respectively. In March 1997 and 1996, the Company
issued 22,177 and 24,859 shares of Common Stock to employees under the incentive
bonus plan for the years ended December 31, 1996, and 1995, respectively.
12. SUBSEQUENT EVENTS
On January 30, 1998, the Company acquired 100% of the outstanding capital
stock of Phoenix Corporation, doing business as Phoenix Metals Company
("Phoenix"), for $21,000,000 in cash. Phoenix is headquartered in Norcross
(Atlanta), Georgia, with additional metals service centers in Birmingham,
Alabama; Tampa, Florida; and Charlotte, North Carolina. The purchase of Phoenix
was funded with proceeds from the 1997 equity offering and borrowings under the
Company's line of credit. Phoenix's net sales for the twelve months ended
February 28, 1997, were approximately $112,000,000.
Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Co., L.L.C. and its subsidiary, Durrett-Sheppard Steel of
Pennsylvania, Inc., through its newly-formed subsidiary, Durrett Sheppard Steel
Co., Inc. ("DSS"), for $30,500,000 in cash. DSS is a metals service center
located in Baltimore, Maryland. This purchase was funded with proceeds from the
1997 equity offering and borrowings under the Company's line of credit.
Durrett-Sheppard Steel Co., L.L.C. had net sales of approximately $47,000,000
for the twelve months ended September 30, 1997.
40
44
RELIANCE STEEL & ALUMINUM CO.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997, 1996 and 1995:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997:
Net sales................... $201,591 $243,824 $254,236 $261,867
Cost of sales............... 155,454 187,922 197,718 196,406
Net income.................. 6,924 8,374 8,415 10,464
Earnings per
share -- Diluted......... .45 .55 .55 .60
1996:
Net sales................... $157,634 $164,628 $153,395 $178,318
Cost of sales............... 120,585 125,506 115,767 130,341
Net income.................. 7,844 7,766 6,973 7,207
Earnings per
share -- Diluted......... .51 .49 .45 .46
1995:
Net sales................... $136,502 $140,753 $135,317 $148,769
Cost of sales............... 105,698 109,512 103,749 113,100
Net income.................. 5,567 5,621 5,676 5,838
Earnings per
share -- Diluted......... .35 .37 .37 .37
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year shown elsewhere in the annual report
and SEC Form 10-K. The 1995, 1996 and first three quarters of 1997 earnings per
share amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, Earnings per Share. All per-share amounts have
been adjusted for the June 1997 3:2 common stock split.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
accountants on any accounting or financial disclosure issues.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The narrative and tabular information included under the caption
"Management" on pages 6 through 7 and under the caption "Compliance with Section
16(a)" on page 17 of the Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The narrative and tabular information, including footnotes thereto,
included under the caption "Executive Compensation" on pages 11 through 15 of
the Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The narrative and tabular information, including footnotes thereto,
included under the caption "Securities Ownership of Certain Beneficial Owners
and Management" on pages 3 and 4 of the Proxy Statement are incorporated herein
by reference.
41
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The narrative information included under the caption "Certain Transactions"
on page 17 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements (Included in Item 8.)
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited) for the Years Ended December
31, 1997, 1996 and 1995
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not significant or is included in the Consolidated Financial Statements
or notes thereto or is not applicable.
(3) Exhibits
3.01 Registrant's Restated Articles of Incorporation(1)
3.02 Registrant's Amended and Restated Bylaws(1)
10.01 Registrant's 1994 Incentive and Non-Qualified Stock Option
Plan and the Forms of Agreements related thereto(1)
10.02 Registrant's Form of Indemnification Agreement for officers
and directors(1)
10.03 Incentive Bonus Plans(1)
10.04 Registrant's Supplemental Executive Retirement Plan dated
January 1, 1996(3)
10.05 Form of Note Purchase Agreement dated September 15, 1997
between each of the purchasers listed on Schedule "A"
attached thereto and the Registrant(4)
10.06 Amendment No. Six to First Amended and Restated Business
Loan Agreement dated March 26, 1997 between the Company and
Bank of America(5)
10.07 Amendment No. Seven to First Amended and Restated Business
Loan Agreement dated June 9, 1997 between the Company and
Bank of America(6)
10.08 Credit Agreement for the $200 Million Syndicated Credit
Facility dated October 22, 1997(4)
21.01 Subsidiaries of Registrant
23.01 Consent of Ernst & Young LLP
24.01 Power of Attorney(2)
- ---------------
(1) Incorporated by reference from Exhibits to Registrant's Registration
Statement on Form S-1, as amended, originally filed on May 25, 1994 as
Commission File No. 33-79318.
(2) Set forth on page 45 of this report.
42
46
(3) Incorporated by reference from Exhibits to Registrant's Form 10-K, for
the year ended December 31, 1996.
(4) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for
the quarter ended September 30, 1997.
(5) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for
the quarter ended March 31, 1997.
(6) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for
the quarter ended June 30, 1997.
(b) Reports on Form 8-K
Registrant filed a Report on Form 8-K dated January 2, 1997, reporting the
issuance of $75,000,000 of senior unsecured notes to insurance companies in
a private placement.
Registrant filed a Report on Form 8-K dated April 2, 1997, reporting the
acquisition of AMI Metals, Inc.
43
47
RELIANCE STEEL & ALUMINUM CO. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1995
Reserve and allowances deducted
from asset accounts
Allowance for uncollectible
accounts....................... $2,050 $2,532 $268 $1,597(1) $3,253
Year Ended December 31, 1996
Reserve and allowances deducted
from asset accounts
Allowance for uncollectible
accounts....................... $3,253 $ 723 $110 $1,187(1) $2,899
Year Ended December 31, 1997
Reserve and allowances deducted
from asset accounts
Allowance for uncollectible
accounts....................... $2,899 $1,277 $692 $ 525(1) $4,343
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
44
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on this 27th
day of March, 1998.
RELIANCE STEEL & ALUMINUM CO.
By: /s/ JOE D. CRIDER
------------------------------------
Joe D. Crider
Chairman and Chief Executive Officer
POWER OF ATTORNEY
The officers and directors of Reliance Steel & Aluminum Co. whose
signatures appear below hereby constitute and appoint Joe D. Crider and David H.
Hannah, or either of them, to act severally as attorneys-in-fact and agents,
with power of substitution and resubstitution, for each of them in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- --------------
/s/ JOE D. CRIDER Chairman of the Board and Chief March 27, 1998
- ------------------------------------- Executive Officer (Principal
Joe D. Crider Executive Officer); Director
/s/ DAVID H. HANNAH President; Director March 27, 1998
- -------------------------------------
David H. Hannah
/s/ GREGG J. MOLLINS Executive Vice President and Chief March 27, 1998
- ------------------------------------- Operating Officer; Director
Gregg J. Mollins
/s/ STEVEN S. WEIS Senior Vice President and Chief March 27, 1998
- ------------------------------------- Financial Officer (Principal
Steven S. Weis Financial Officer)
/s/ KARLA R. MCDOWELL Vice President and Controller March 27, 1998
- ------------------------------------- (Principal Accounting Officer)
Karla R. McDowell
/s/ DOUGLAS M. HAYES Director March 27, 1998
- -------------------------------------
Douglas M. Hayes
/s/ ROBERT HENIGSON Director March 27, 1998
- -------------------------------------
Robert Henigson
/s/ KARL H. LORING Director March 27, 1998
- -------------------------------------
Karl H. Loring
/s/ WILLIAM I. RUMER Director March 27, 1998
- -------------------------------------
William I. Rumer
/s/ LESLIE A. WAITE Director March 27, 1998
- -------------------------------------
Leslie A. Waite
45
49
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
3.01 Registrant's Restated Articles of Incorporation(1)..........
3.02 Registrant's Amended and Restated Bylaws(1).................
10.01 Registrant's 1994 Incentive and Non-Qualified Stock Option
Plan and the Forms of Agreements related thereto(1).........
10.02 Registrant's Form of Indemnification Agreement for officers
and directors(1)............................................
10.03 Incentive Bonus Plan(1).....................................
10.04 Registrant's Supplemental Executive Retirement Plan dated
January 1, 1996(3)..........................................
10.05 Form of Note Purchase Agreement dated September 15, 1997
between each of the purchasers listed on Schedule "A"
attached thereto and the Registrant(4)......................
10.06 Amendment No. Six to First Amended and Restated Business
Loan Agreement dated March 26, 1997 between the Company and
Bank of America(5)..........................................
10.07 Amendment No. Seven to First Amended and Restated Business
Loan Agreement dated June 9, 1997 between the Company and
Bank of America(6)..........................................
10.08 Credit Agreement for the $200 Million Syndicated Credit
Facility Dated October 22, 1997(4)..........................
21.01 Subsidiaries of Registrant..................................
23.01 Consent of Ernst & Young LLP................................
24.01 Power of Attorney(2)........................................
- ---------------
(1) Incorporated by reference from Exhibits to Registrant's Registration
Statement on Form S-1, as amended, originally filed on May 25, 1994 as
Commission File No. 33-79318.
(2) Set forth on page 45 of this report.
(3) Incorporated by reference from Exhibits to Registrant's Form 10-K, for the
year ended December 31, 1996.
(4) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for the
quarter ended September 30, 1997.
(5) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for the
quarter ended March 31, 1997.
(6) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for the
quarter ended June 30, 1997.