RS

Business Context and Reporting Period

Company: Reliance Steel & Aluminum Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company processes and distributes steel, aluminum, and stainless steel products. The reporting period was significantly impacted by the acquisition of the steel service centers division of Pitt-Des Moines, Inc. (PDM) in July 2001, as well as deteriorating market demand and lower metal pricing following the September 11th events.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 3.1% for both the three-month and nine-month periods compared to 2000. This was driven by a 15.5% drop in average selling price per ton (quarterly) and a 6.3% drop (nine-month), partially offset by a 14.1% increase in tons sold (quarterly) due to acquisitions.
• Same-Store Performance: Excluding acquired businesses, same-store sales dropped 20.2% in the quarter and 13.7% for the nine months, reflecting deteriorating demand and the impact of the September 11th attacks.
• Profitability: Despite lower sales, gross profit remained flat in the quarter and declined only 0.3% for the nine months. Gross margin improved to 27.5% (quarterly) and 27.7% (nine-month) due to disciplined pricing and inventory management.
• Expenses: Selling, General, and Administrative (S,G&A) expenses increased 15.9% in the quarter and 8.5% for the nine months, primarily due to the inclusion of acquired entities. On a same-store basis, S,G&A expenses decreased due to workforce reductions (9.7% headcount reduction since Dec 31, 2000).
• Debt Reduction: Total debt decreased from $421.9 million to $358.3 million. Interest expense decreased 11.5% in the quarter but increased 13.0% for the nine months due to acquisition funding, partially offset by lower rates and debt paydowns.

Guidance, Outlook, and Risks

• Acquisitions: The Company acquired PDM Steel Service Centers (July 2001), Aluminum and Stainless, Inc. (Jan 2001), and Viking Materials (Jan 2001). These acquisitions increased the carbon steel product mix to 56.4%.
• Capital Structure: In July 2001, the Company issued 6.3 million shares of common stock for net proceeds of approximately $149.8 million, used to pay down acquisition-related debt. In October 2001 (post-period), the Company refinanced its credit facility, expanding the revolving line to $335 million.
• Liquidity: Working capital increased to $392.7 million. Management anticipates that funds from operations and the new credit facility will be sufficient for foreseeable needs.
• Risks: The Company faces risks related to general economic conditions, metal pricing volatility, and competition. The Pacific Northwest region remains weak, impacting the 50%-owned company, American Steel, L.L.C.
• Accounting Changes: The Company adopted SFAS No. 141 and 142 regarding business combinations and goodwill. Goodwill will no longer be amortized but subject to annual impairment tests starting in 2002.

Investor Verification Checklist

• Acquisition Integration: Verify the financial contribution and integration status of the PDM acquisition, which contributed $45 million in sales in the third quarter.
• Same-Store Trends: Monitor the continued decline in same-store sales (-20.2% quarterly) to assess the severity of the market downturn and the impact of the September 11th events.
• Debt Covenants: Review the terms of the new $335 million credit facility and the $290 million in senior unsecured notes to ensure compliance with minimum net worth and dividend restrictions.
• Goodwill Impairment: Watch for the results of the first annual goodwill impairment test required under SFAS 142 in 2002, given the significant goodwill balance ($271.3 million).
• Product Mix Shift: Confirm the sustainability of the shift toward lower-priced carbon steel products and its long-term impact on gross margins.