RELIANCE STEEL & ALUMINUM CO - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002


[ ]		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)


California (State or other jurisdiction of incorporation or organization)		95-1142616 (I.R.S. Employer Identification No.)

350 South Grand Avenue, Suite 5100
Los Angeles, California 90071
(213) 687-7700
(Address of principal executive offices and telephone number)

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 [ ]

As of October 31, 2002, 31,752,087 shares of the registrant’s common stock, no par value, were outstanding.

TABLE OF CONTENTS


	CONSOLIDATED BALANCE SHEETS
	UNAUDITED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30
	UNAUDITED CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30
	UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Market Risk
	Controls and Procedures
PART II — OTHER INFORMATION
SIGNATURES
Certification
EXHIBIT 99.2

RELIANCE STEEL & ALUMINUM CO.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


PART I — FINANCIAL INFORMATION		1
	Consolidated Balance Sheets at September 30, 2002 (Unaudited) and December 31, 2001	1
	Unaudited Consolidated Statements of Income for the Three Months in the Periods Ended September 30, 2002 and 2001	2
	Unaudited Consolidated Statements of Income for the Nine Months in the Periods Ended September 30, 2002 and 2001	3
	Unaudited Consolidated Statements of Cash Flows for the Nine Months in the Periods Ended September 30, 2002 and 2001	4
	Notes to Unaudited Consolidated Financial Statements	5
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Market Risk	13
	Controls and Procedures	13
PART II — OTHER INFORMATION		14
SIGNATURES		15
CERTIFICATIONS		16

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED BALANCE SHEETS

(In thousands except share amounts)

ASSETS


			September 30,			December 31,
			2002			2001

			(Unaudited)
Current assets:
	Cash and cash equivalents		$	9,277		$	9,931
	Accounts receivable, less allowance for doubtful accounts of $6,400 at September 30, 2002 and $5,417 at December 31, 2001			211,024			172,603
	Inventories			320,730			308,093
	Prepaid expenses and other current assets			9,730			8,903
	Deferred income taxes			18,648			18,463

		Total current assets		569,409			517,993
Property, plant and equipment, at cost:
	Land			51,815			48,598
	Buildings			182,841			168,963
	Machinery and equipment			243,970			207,243
	Accumulated depreciation			(176,260	)		(134,451	)

				302,366			290,353
Investment in 50%-owned company				—			12,352
Goodwill, net of accumulated amortization of $33,024 at September 30, 2002 and $26,254 at December 31, 2001				291,241			250,103
Other assets				14,702			11,492

		Total assets	$	1,177,718		$	1,082,293

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	97,568		$	69,870
	Accrued expenses			45,683			32,822
	Wages and related accruals			18,946			17,430
	Deferred income taxes			7,555			7,555
	Current maturities of long-term debt			325			10,325

		Total current liabilities		170,077			138,002
Long-term debt				358,390			331,975
Deferred income taxes				28,433			28,433
Minority interest				10,107			—
Commitments and contingencies				—			—
Shareholders’ equity:
	Preferred stock, no par value:
		Authorized shares — 5,000,000
		None issued and outstanding		—			—
	Common stock, no par value:
		Authorized shares — 100,000,000
		Issued and outstanding shares 31,752,087 at September 30, 2002 and 31,572,601 at December 31, 2001, stated capital		294,503			290,798
	Retained earnings			317,157			294,091
	Accumulated other comprehensive loss			(949	)		(1,006	)

		Total shareholders’ equity		610,711			583,883

		Total liabilities and shareholders’ equity	$	1,177,718		$	1,082,293

See accompanying notes to consolidated financial statements.

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(In thousands except share and per share amounts)


		Three Months Ended
		September 30,

		2002		2001

Net sales		$	454,840	$	430,066
Other income, net			384		923

			455,224		430,989
Costs and expenses:
	Cost of sales		329,321		311,671
	Warehouse, delivery, selling, general and administrative		96,375		91,608
	Depreciation and amortization		7,365		8,433
	Interest		5,749		6,115

			438,810		417,827

Income before equity in earnings of 50%-owned company, minority interest and income taxes			16,414		13,162
Equity in earnings of 50%-owned company			—		(44	)
Minority interest			85		—

Income before provision for income taxes			16,499		13,118
Provision for income taxes			6,534		5,326

Net income		$	9,965	$	7,792

Earnings per share — diluted		$	.31	$	.25

Weighted average shares outstanding — diluted			31,815,003		31,417,340

Earnings per share — basic		$	.31	$	.25

Weighted average shares outstanding — basic			31,719,972		31,280,710

Cash dividends per share		$	.06	$	.06

See accompanying notes to consolidated financial statements.

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(In thousands except share and per share amounts)


		Nine Months Ended
		September 30,

		2002		2001

Net sales		$	1,310,492	$	1,274,953
Other income, net			1,620		2,507

			1,312,112		1,277,460
Costs and expenses:
	Cost of sales		947,385		921,419
	Warehouse, delivery, selling, general and administrative		280,297		258,704
	Depreciation and amortization		21,297		23,927
	Interest		16,786		21,007

			1,265,765		1,225,057

Income before equity in earnings of 50%-owned company, minority interest and income taxes			46,347		52,403
Equity in earnings of 50%-owned company			263		339
Minority interest			128		—

Income before provision for income taxes			46,738		52,742
Provision for income taxes			18,508		20,780

Net income		$	28,230	$	31,962

Earnings per share — diluted		$	.89	$	1.17

Weighted average shares outstanding — diluted			31,816,566		27,397,865

Earnings per share — basic		$	.89	$	1.17

Weighted average shares outstanding — basic			31,665,281		27,246,073

Cash dividends per share		$	.18	$	.18

See accompanying notes to consolidated financial statements.

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


			Nine Months Ended
			September 30,

			2002			2001

Operating activities:
Net income			$	28,230		$	31,962
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			21,297			23,927
	Deferred taxes			—			(335	)
	Loss on sales of machinery and equipment			183			383
	Equity in earnings of 50%-owned company			(263	)		(339	)
	Minority interest			41			—
	Other comprehensive income			(381	)		—
	Changes in operating assets and liabilities:
		Accounts receivable		(26,784	)		22,037
		Inventories		16,744			27,897
		Prepaid expenses and other assets		(1,122	)		(1,897	)
		Accounts payable and accrued expenses		32,972			(23,967	)

Net cash provided by operating activities				70,917			79,668
Investing activities:
Purchases of property, plant and equipment, net				(12,426	)		(19,990	)
Proceeds from sales of property and equipment				331			1,447
Acquisitions of metals service centers and net asset purchases of metals service centers, net of cash acquired				(53,318	)		(130,797	)
Dividends received from 50%-owned company				444			6,924

Net cash used in investing activities				(64,969	)		(142,416	)
Financing activities:
Proceeds from borrowings				96,825			225,000
Principal payments on long-term debt and short-term borrowings				(100,155	)		(304,654	)
Payments to minority partner				(2,251	)		—
Dividends paid				(5,700	)		(4,918	)
Issuance of common stock				4,241			2,005
Net proceeds from common stock offering				—			149,756

Net cash (used in) provided by financing activities				(7,040	)		67,189
Effect of exchange rate changes on cash				438			(814	)

(Decrease) increase in cash and cash equivalents				(654	)		3,627
Cash and cash equivalents at beginning of period				9,931			3,107

Cash and cash equivalents at end of period			$	9,277		$	6,734

Supplemental cash flow information:
Interest paid during the period			$	11,609		$	21,850
Income taxes paid during the period			$	18,689		$	15,273

See accompanying notes to consolidated financial statements.

RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation, with respect to the interim financial statements have been included. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results for the full year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2001, included in the Reliance Steel & Aluminum Co. Annual Report on Form 10-K. Certain reclassifications have been made to the 2001 balances to conform to the 2002 presentation.

2. Impact of Recently Issued Accounting Standards

In September 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 is effective for any business combinations completed after June 30, 2001 and SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

The Company has adopted the provisions of SFAS No. 141 for acquisitions completed subsequent to June 30, 2001 and has adopted SFAS No. 142 effective January 1, 2002. The Company has performed a transitional assessment of impairment of goodwill by applying fair-value-based tests and has determined that no impairment existed at January 1, 2002. The pro forma effect of these new accounting rules on net income and earnings per share for the three and nine months ended September 30, 2001 is as follows:


		Three Months		Nine Months
		Ended September 30, 2001		Ended September 30, 2001

		(In thousands, except per share amounts)
Net Income
	Reported net income	$	7,792	$	31,962
	Goodwill amortization, net of tax		1,898		5,380

	Pro forma net income	$	9,690	$	37,342

Earnings per share (Basic)
	Reported	$	.25	$	1.17
	Goodwill amortization, net of tax		.04		.12

	Pro forma earnings per share — basic	$	.29	$	1.29

Earnings per share (Diluted)
	Reported	$	.25	$	1.17
	Goodwill amortization, net of tax		.04		.12

	Pro forma earnings per share — diluted	$	.29	$	1.29

RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. Acquisitions

On September 9, 2002, the Company, through a newly-formed subsidiary, purchased, for $30 million, certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., after final approval of the U.S. Bankruptcy Court, in connection with Metals USA’s bankruptcy filing. The business is now operating under its original name, Pacific Metal Company. Pacific Metal Company has locations in Portland, Eugene and Medford, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana; and Boise, Idaho and processes and distributes mainly aluminum and coated carbon steel products. Sales of Metals USA Specialty Metals Northwest, Inc. were $76 million for the year ended December 31, 2001. This acquisition broadens the Company’s product offerings and also provides entries into new geographic markets in Idaho and Montana. Pacific Metal Company operates as a wholly-owned subsidiary of the Company. This purchase was funded with borrowings under the Company’s line of credit. The purchase price allocation for this acquisition has not been finalized, pending the completion of valuations of real and personal property and intangibles.

On April 1, 2002, the Company, through a newly-formed subsidiary, purchased substantially all of the net assets and business of Central Plains Steel Co., a privately-held, full-line carbon steel service center, with facilities in Kansas City and Wichita, Kansas. Central Plains Steel Co. had sales of approximately $39 million for the year ended December 31, 2001, and now operates as a wholly-owned subsidiary of the Company under its former name, Central Plains Steel Co. This acquisition strengthens the Company’s market presence and complements its existing facilities in this area of its geographic network. This purchase was funded with borrowings under the Company’s line of credit. The purchase price allocation for this acquisition has not been finalized, pending the completion of valuations of personal property and intangibles.

Also on April 1, 2002, the Company acquired all of the outstanding stock of Olympic Metals, Inc., a privately-held metals service center in Denver, Colorado. Olympic specializes in the processing and distribution of aluminum, red metals and stainless steel products and had sales of approximately $8 million for the twelve months ended December 31, 2001. This acquisition strengthens the Company’s position and broadens its customer base in this area of its existing geographic network. Olympic operates as a wholly-owned subsidiary of the Company. This acquisition was funded with cash generated from operations.

These transactions have been accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated statements of income include the revenues and expenses of each acquisition since its respective acquisition date. The consolidated financial statements reflect the preliminary allocations of the purchase price. The allocations of purchase price were based upon the preliminary estimation of fair values of the net assets purchased.

Effective May 1, 2002, the O

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