RS

Business Context and Reporting Period

Company: Reliance Steel & Aluminum Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: The Company operates as a metals service center, processing and distributing carbon steel, stainless steel, and aluminum products. The reporting period reflects the impact of a general economic downturn, particularly in the semiconductor and construction sectors, partially offset by growth in the aerospace industry and strategic acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 3.1% for the six months ended June 30, 2001, driven by a 1.3% drop in tons sold and a 1.2% decrease in average selling price. Same-store sales fell 10.5% due to reduced demand in the semiconductor and electronics industries.
• Profitability: Despite lower sales volume, gross profit margins improved to 27.8% (from 27.1%) due to product mix shifts and the inclusion of higher-margin acquired businesses. Net income declined 26.4% primarily due to lower sales volume and increased interest expense.
• Acquisitions: The Company acquired Aluminum and Stainless, Inc. and Viking Materials, Inc. in early 2001, funded by borrowings. These acquisitions contributed to revenue but also increased depreciation, amortization, and interest expenses.
• Debt Levels: Total debt increased to $460.45 million from $421.98 million at year-end 2000. Interest expense rose 27.5% year-over-year to fund acquisitions and a prior stock repurchase.
• Cash Flow: Operating cash flow turned positive at $37.4 million, a significant improvement from a $21.8 million outflow in the prior year, largely due to reduced working capital requirements associated with lower sales volumes.

Outlook, Risks, and Subsequent Events

• Subsequent Equity Offering: On July 5, 2001, the Company completed a public offering of 6,325,000 shares at $25.00 per share, raising approximately $150 million in net proceeds. These funds were used to repay debt related to the July 2, 2001 acquisition of the steel service centers division of Pitt-Des Moines, Inc., and for general working capital.
• Acquisition of Pitt-Des Moines: On July 2, 2001, the Company acquired the steel service centers division of Pitt-Des Moines, Inc. for approximately $97.5 million. This acquisition expands the Company's footprint in the western United States.
• Refinancing: The Company is in the process of refinancing its $200 million revolving line of credit to an increased amount to support future growth.
• Risks: The Company faces risks related to general economic conditions, metal pricing volatility, and competition. Management notes that results for any single quarter are not necessarily indicative of annual results due to seasonality and economic fluctuations.
• Accounting Changes: The Company will adopt SFAS No. 141 and 142 in 2002, which will stop the amortization of goodwill and require annual impairment testing instead.

Investor Verification Checklist

• Debt Servicing: Verify the impact of the $460 million debt load on future interest expenses, particularly given the variable rate portion of the revolving credit facility.
• Integration of Acquisitions: Monitor the financial performance of the newly acquired entities (Aluminum & Stainless, Viking, and Pitt-Des Moines) to ensure they meet projected margin contributions.
• Working Capital Trends: Confirm that the reduction in receivables and inventory is a result of operational efficiency rather than a loss of market share.
• Use of Proceeds: Track the deployment of the $150 million raised in the July 2001 equity offering to ensure it effectively reduces the debt burden as stated.
• Goodwill Impairment: Watch for the first annual goodwill impairment test results in 2002 under the new SFAS 142 rules, which could impact future earnings.