RS

Business Context and Reporting Period

Company: Reliance Steel & Aluminum Co. (Reliance)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Industry: Metals Service Center (North America's largest by revenue)
Operations: Over 200 locations in 38 U.S. states and international markets (Canada, Belgium, China, Mexico, Singapore, South Korea, UK). The company distributes and processes over 100,000 metal products for more than 125,000 customers.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 39.0% year-over-year, driven by a 15.4% drop in tons sold and a 27.5% decrease in average selling price per ton due to the global economic recession.
• Profitability Resilience: Despite the revenue collapse, the company remained profitable. Gross margin improved to 26.3% from 24.8% in 2008, aided by a $305.0 million LIFO credit (inventory cost reduction) and better alignment of inventory costs with replacement costs in the second half of 2009.
• Debt Reduction: The company aggressively reduced debt by $831.2 million using record operating cash flows. Total debt fell from $1.77 billion to $939.6 million.
• Cost Management: Workforce was reduced by approximately 1,700 employees (16%) in 2009, and total operating expenses decreased by 14.9% compared to 2008.
• Acquisition Activity: No acquisitions were completed in 2009 due to the economic climate, contrasting with the $1.1 billion PNA Group acquisition in August 2008.

Guidance, Outlook, and Risks

• Outlook: Management expects demand to recover slowly in 2010. Prices are expected to remain stable through the first quarter of 2010. Gross profit margins are projected to range between 25% and 27%.
• Capital Expenditures: The 2010 capital expenditure budget is approximately $140 million, focused on internal growth and facility expansions.
• Acquisition Strategy: The company plans to resume acquisitions in the second half of 2010 as market conditions improve, subject to credit facility restrictions.
• Key Risks:
  • Economic Sensitivity: Continued low demand and pricing pressure in cyclical industries (construction, manufacturing, transportation).
  • Commodity Volatility: Fluctuations in metal prices and the ability to pass cost increases to customers.
  • Credit Availability: Customer creditworthiness remains a concern, with bad debt write-offs increasing to $19.6 million in 2009 (0.4% of sales) compared to $8.1 million in 2008.
  • Debt Covenants: The company amended its credit facility in September 2009 to relax covenants through June 30, 2010, but remains subject to leverage and interest coverage ratios.

Investor Verification Checklist

• Inventory Valuation: Verify the impact of the $305 million LIFO credit on 2009 earnings and the current replacement cost of inventory relative to carrying value.
• Customer Credit Quality: Monitor the allowance for doubtful accounts ($21.3 million) and potential for increased write-offs if customer liquidity tightens further.
• Debt Covenant Compliance: Confirm continued compliance with the amended interest coverage (3.9x actual vs. 2.0x required) and leverage ratios (27.5% actual vs. 50% max) post-June 2010 when covenants tighten.
• Same-Store Sales: Review same-store sales trends (down 45.1% in 2009) to gauge organic performance excluding the impact of the 2008 PNA acquisition.
• Goodwill Impairment: Assess the $1.08 billion goodwill balance against potential future declines in market capitalization or cash flow projections.