What drove the increase in acquisitions and debt in 2006?

The company acquired Earle M. Jorgensen Company for a transaction value of about $984 million, including assumed net debt, and Yarde Metals for $100 million in cash plus about $101 million of assumed net debt. Funding came from stock, borrowings, and the assumption of debt. Total debt rose to about $1.1 billion at December 31, 2006, and the company issued $600 million of senior unsecured notes in November 2006.

What is the outlook for stainless steel and carbon steel pricing?

The filing says stainless steel prices reached unprecedented levels in 2006 and continued rising in 2007 due to a global nickel shortage. Management expects stainless prices to decline but is uncertain about the timing or severity. Carbon steel pricing declined in the fourth quarter of 2006 due to increased imports and distributor inventory, but certain domestic mills reduced capacity in early 2007, which improved pricing somewhat.

What changed in the dividend policy?

In February 2007, the Board increased the quarterly cash dividend 33%, from $.06 to $.08 per share. Earlier, in July 2006, the dividend rose 20% from $.05 to $.06 alongside a 2-for-1 stock split. The filing notes that dividends were 5% of 2006 earnings, and the company says it intends to retain part of its earnings for reinvestment.

What are the main risks highlighted in the filing?

Key risks include variable-rate debt, which the filing says may face higher interest rates in 2007; metal price volatility, which can squeeze margins if costs rise faster than selling prices; and cyclical end markets such as construction, aerospace, and energy. The filing also notes that about $1.1 billion of debt and covenants could limit financial flexibility, and that a hypothetical one percent rate increase would not be material to earnings based on $203 million of variable-rate borrowings.

RS 10-K FY2006 Annual Report — Revenue, Net Income, EPS

Q: How did Reliance perform financially in 2006?

Net sales were a record $5.74 billion, compared with $3.37 billion in 2005. Net income was $354.5 million, compared with $205.4 million, and diluted EPS from continuing operations was $4.82, compared with $3.10. The filing attributes most of the increase to 2006 acquisitions, with same-store sales up 15.9% to $3.75 billion.

01—Abstract

Summary

Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.

Reliance Steel & Aluminum Co. reported record 2006 results, with net sales of $5.74 billion^a, up from $3.37 billion in 2005, and net income of $354.5 million, up from $205.4 million.

The growth was driven mainly by the 2006 acquisitions of Earle M. Jorgensen Company (EMJ) and Yarde Metals, which the filing says added $1.6 billion^b to consolidated sales. Operating profit rose to $634.2 million from $367.6 million, and diluted EPS from continuing operations was $4.82, compared with $3.10 in 2005.

The filing states that same-store sales, excluding 2005 and 2006 acquisitions, rose 15.9% to $3.75 billion^c. The balance sheet expanded substantially. Total assets were $3.61 billion, goodwill was $784.9 million, and total debt was about $1.1 billion, up from $356.9 million at year-end 2005.

The company recapitalized in late 2006 by issuing $600 million^d of senior unsecured notes and replacing its credit facility with a $1.1 billion syndicated facility. Operating cash flow fell to $191.0 million from $272.2 million, mainly because of higher working capital needs. The filing also reports that the net debt-to-total capital ratio rose to 37.6% from 23.8%.

The filing describes several early-2007 developments. Reliance acquired Encore Group, Crest Steel, and Industrial Metals and Surplus, and the Board raised the quarterly dividend from $.06 to $.08 per share.

Management cites record stainless steel prices driven by nickel shortages and says it expects stainless prices to decline, though the timing is uncertain. The filing also highlights risks, including rising interest rates on variable-rate debt, metal price volatility, and cyclical end markets.

02—Key points

Key Highlights

Record 2006 net sales of $5.74 billion (up from $3.37 billion in 2005) and net income of $354.5 million (up from $205.4 million).
Operating profit rose to $634.2 million from $367.6 million, with gross profit margin at 26.3% versus 27.3% in 2005.
Acquisitions of EMJ (April 2006) and Yarde Metals (August 2006) were the main growth drivers; the filing states they added $1.6 billion to 2006 consolidated sales.
Total debt rose to about $1.1 billion from $356.9 million, and the net debt-to-total capital ratio rose to 37.6% from 23.8%.
Operating cash flow fell to $191.0 million from $272.2 million, driven by higher working capital needs from increased demand and pricing.
Quarterly dividend increased 33% to $.08 per share in February 2007, following a 20% increase in July 2006 and a 2-for-1 stock split.
Early-2007 acquisitions of Encore Group, Crest Steel, and Industrial Metals and Surplus were funded through the credit facility.

03—Questions

Frequently Asked Questions

How did Reliance perform financially in 2006?
Net sales were a record $5.74 billion, compared with $3.37 billion in 2005. Net income was $354.5 million, compared with $205.4 million, and diluted EPS from continuing operations was $4.82, compared with $3.10. The filing attributes most of the increase to 2006 acquisitions, with same-store sales up 15.9% to $3.75 billion.
What drove the increase in acquisitions and debt in 2006?
The company acquired Earle M. Jorgensen Company for a transaction value of about $984 million, including assumed net debt, and Yarde Metals for $100 million in cash plus about $101 million of assumed net debt. Funding came from stock, borrowings, and the assumption of debt. Total debt rose to about $1.1 billion at December 31, 2006, and the company issued $600 million of senior unsecured notes in November 2006.
What is the outlook for stainless steel and carbon steel pricing?
The filing says stainless steel prices reached unprecedented levels in 2006 and continued rising in 2007 due to a global nickel shortage. Management expects stainless prices to decline but is uncertain about the timing or severity. Carbon steel pricing declined in the fourth quarter of 2006 due to increased imports and distributor inventory, but certain domestic mills reduced capacity in early 2007, which improved pricing somewhat.
What changed in the dividend policy?
In February 2007, the Board increased the quarterly cash dividend 33%, from $.06 to $.08 per share. Earlier, in July 2006, the dividend rose 20% from $.05 to $.06 alongside a 2-for-1 stock split. The filing notes that dividends were 5% of 2006 earnings, and the company says it intends to retain part of its earnings for reinvestment.
What are the main risks highlighted in the filing?
Key risks include variable-rate debt, which the filing says may face higher interest rates in 2007; metal price volatility, which can squeeze margins if costs rise faster than selling prices; and cyclical end markets such as construction, aerospace, and energy. The filing also notes that about $1.1 billion of debt and covenants could limit financial flexibility, and that a hypothetical one percent rate increase would not be material to earnings based on $203 million of variable-rate borrowings.

04—Continue

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