RS

Business Context and Reporting Period

Company: Reliance Steel & Aluminum Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Industry: Metals Service Centers (Distribution and processing of carbon steel, aluminum, stainless steel, and specialty metals).
Operations: Operates 106 facilities across 30 U.S. states, Belgium, France, and South Korea. The company serves over 95,000 customers in manufacturing, construction, transportation, aerospace, and semiconductor industries.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7.9% to $1.88 billion, driven primarily by the acquisition of Precision Strip, Inc. and higher average selling prices (up 5.7% per ton), despite a 1.1% decrease in tons sold excluding the acquisition.
• Acquisition Impact: On July 1, 2003, the company acquired Precision Strip, Inc. for approximately $220 million in cash plus $26 million in assumed debt. This acquisition added $62 million in sales for the six months ended Dec 31, 2003.
• Margin Pressure: Gross margin percentage declined slightly from 27.3% to 27.1%. This was due to competitive pricing pressures in the first half of 2003 where selling prices were reduced faster than material costs. Margins improved in the second half as demand recovered.
• Debt Levels: Long-term debt increased significantly to fund the Precision Strip acquisition. The net debt-to-total capital ratio rose from 35.4% to 43.1%.
• Inventory Management: Inventory levels decreased by $20.0 million, and inventory turnover improved from 4.25 times in 2002 to 4.7 times in 2003.

Guidance, Outlook, and Risks

Outlook: Management anticipates demand will remain strong through the first quarter of 2004 with continued price increases in the first half of 2004. Supply of many products is expected to be tight. The company expects to reduce its leverage ratio by the end of 2004 before pursuing further acquisitions.

Key Risks and Contingencies:

• Interest Rate Risk: Variable rate debt is at historically low levels; anticipated rate increases could raise interest expenses.
• Commodity Price Volatility: Fluctuations in metal prices (scrap, raw materials, energy) impact costs. While the company typically passes costs to customers, low demand periods make this difficult.
• Acquisition Integration: Risk that the Precision Strip acquisition may not perform as anticipated, potentially leading to goodwill impairment.
• Economic Cyclicality: The business is sensitive to economic downturns in key customer industries (aerospace, semiconductor, construction).
• Supply Constraints: Tight supply of metals due to foreign demand and domestic mill closures could result in an inability to fill customer orders.

Investor Verification Checklist

• Acquisition Performance: Verify the integration progress and financial contribution of Precision Strip, Inc. against the $220 million investment.
• Debt Covenants: Confirm compliance with the amended financial covenants (leverage ratio, interest coverage) following the increased debt load.
• Margin Sustainability: Monitor the ability to pass through rising raw material costs (scrap, energy) to customers as demand fluctuates.
• Goodwill Valuation: Review the annual impairment testing of the $325.3 million goodwill balance, which represents 50.2% of shareholders' equity.
• Inventory Turnover: Track inventory levels to ensure they remain optimized given the tight supply environment and potential price volatility.