How did Reliance perform financially in 2005?

Reliance reported record net sales of $3.37 billion, up 14.4% from $2.94 billion in 2004, and record net income of $205.4 million. Operating profit rose to $367.6 million, and the operating margin was 10.9%, compared with 10.4% in 2004. Growth was driven by higher average selling prices per ton, which rose 12.5%, along with the Chapel Steel acquisition, while same-store tons sold declined 3.9%.

What is the status of the proposed EMJ acquisition?

In January 2006 Reliance agreed to acquire Earle M. Jorgensen Company for approximately $13.00 per share, valued at about $934 million including net debt. EMJ stockholders would receive $6.50 in cash and a fraction of a Reliance share, with an exchange ratio between 0.0892 and 0.1207 shares. Holders of 50.1% of EMJ's stock agreed to vote for the merger, and a special EMJ stockholder meeting was scheduled for March 31, 2006. The company expected to close the transaction in April 2006 if approved.

Why did gross profit margins decline in 2005?

Gross profit margin fell to 27.3% from 28.3% in 2004. The filing attributes this mainly to pressure on carbon steel selling prices as costs declined during the first eight months of 2005, compared with high profitability in 2004. Aerospace product margins were higher because prices rose ahead of costs, and the Chapel Steel acquisition lowered the consolidated margin because it operates at lower margins. LIFO expense also fell to $16.6 million from $110.8 million.

How strong is the company's balance sheet and liquidity?

At December 31, 2005, total indebtedness was $350.8 million, and the net debt-to-total capital ratio was 23.8%, down from 33.6%. Working capital was $513.5 million, and the company had $600 million in unsecured revolving credit capacity under a facility maturing June 2010, with $15.2 million of letters of credit outstanding. Management stated that funds from operations and the credit line are expected to meet working capital, capital expenditure and debt repayment needs for the foreseeable future.

What are the main risks highlighted for investors?

The filing highlights metal price volatility, cyclical end markets such as construction, semiconductor and aerospace, and dependence on a few major suppliers. Execution risk on the EMJ acquisition is also cited, including integration of the largest acquisition to date, assumed pension obligations, and potential goodwill impairment. Higher debt after the EMJ merger, variable-rate borrowing exposure, and the 12.7% holding of principal shareholder Florence Neilan are also noted as factors that could affect shareholders.

RS 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2006. Cited figures are marked; the original filing is the authoritative source.

Reliance Steel & Aluminum Co. reported record 2005 results, with net sales of $3.37 billion^a (up from $2.94 billion in 2004) and net income of $205.4 million (up from $169.7 million).

Diluted earnings per share from continuing operations were $6.21^b, compared with $5.19 in 2004. Operating profit rose to $367.6 million, and cash flow from operations reached $272.2 million, which management described as its highest ever. Gross profit margin declined to 27.3% from 28.3%, as carbon steel pricing pressure in the first eight months of 2005 offset strong aerospace pricing.

The Chapel Steel acquisition, completed July 1, 2005 for about $94.2 million^c in cash plus $16.8 million of assumed debt, contributed to sales growth. The most significant pending event is the agreement to acquire Earle M. Jorgensen Company (EMJ) for approximately $13.00 per share in cash and stock, valued at about $934 million including assumed net debt.

The cash portion of roughly $385 million^d will be financed under the $600 million syndicated credit facility, which is to increase to $700 million at closing, and the company expects to assume about $286 million of EMJ's long-term debt. Management expected the EMJ closing in early April 2006, subject to EMJ stockholder approval.

At year-end, total debt was $350.8 million, the net debt-to-total capital ratio was 23.8% (down from 33.6%), and shareholders' equity rose to $1.03 billion. The company also completed the purchase of the remaining 49.5% of American Steel, L.L.C. for $12 million in January 2006 and acquired Everest Metals in China on March 1, 2006.

02—Key points

Key Highlights

Record 2005 net sales of $3.37 billion and net income of $205.4 million, versus $2.94 billion and $169.7 million in 2004.
Diluted EPS from continuing operations of $6.21 in 2005, up from $5.19 in 2004.
Gross profit of $918.1 million, with gross margin of 27.3%, down from 28.3% in 2004 due to carbon steel price pressure.
Cash flow from operations of $272.2 million, described by management as its highest ever.
Pending acquisition of Earle M. Jorgensen Company for about $934 million including net debt, with about $385 million in cash and roughly $339 million in Reliance common stock, expected to close in April 2006.
Total debt reduced to $350.8 million at December 31, 2005; net debt-to-total capital fell to 23.8% from 33.6%.
Quarterly dividend increased 11% to $.10 per share in July 2005; full-year 2005 dividends were $.38 per share.

03—Questions

Frequently Asked Questions

How did Reliance perform financially in 2005?
Reliance reported record net sales of $3.37 billion, up 14.4% from $2.94 billion in 2004, and record net income of $205.4 million. Operating profit rose to $367.6 million, and the operating margin was 10.9%, compared with 10.4% in 2004. Growth was driven by higher average selling prices per ton, which rose 12.5%, along with the Chapel Steel acquisition, while same-store tons sold declined 3.9%.
What is the status of the proposed EMJ acquisition?
In January 2006 Reliance agreed to acquire Earle M. Jorgensen Company for approximately $13.00 per share, valued at about $934 million including net debt. EMJ stockholders would receive $6.50 in cash and a fraction of a Reliance share, with an exchange ratio between 0.0892 and 0.1207 shares. Holders of 50.1% of EMJ's stock agreed to vote for the merger, and a special EMJ stockholder meeting was scheduled for March 31, 2006. The company expected to close the transaction in April 2006 if approved.
Why did gross profit margins decline in 2005?
Gross profit margin fell to 27.3% from 28.3% in 2004. The filing attributes this mainly to pressure on carbon steel selling prices as costs declined during the first eight months of 2005, compared with high profitability in 2004. Aerospace product margins were higher because prices rose ahead of costs, and the Chapel Steel acquisition lowered the consolidated margin because it operates at lower margins. LIFO expense also fell to $16.6 million from $110.8 million.
How strong is the company's balance sheet and liquidity?
At December 31, 2005, total indebtedness was $350.8 million, and the net debt-to-total capital ratio was 23.8%, down from 33.6%. Working capital was $513.5 million, and the company had $600 million in unsecured revolving credit capacity under a facility maturing June 2010, with $15.2 million of letters of credit outstanding. Management stated that funds from operations and the credit line are expected to meet working capital, capital expenditure and debt repayment needs for the foreseeable future.
What are the main risks highlighted for investors?
The filing highlights metal price volatility, cyclical end markets such as construction, semiconductor and aerospace, and dependence on a few major suppliers. Execution risk on the EMJ acquisition is also cited, including integration of the largest acquisition to date, assumed pension obligations, and potential goodwill impairment. Higher debt after the EMJ merger, variable-rate borrowing exposure, and the 12.7% holding of principal shareholder Florence Neilan are also noted as factors that could affect shareholders.

04—Continue

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