10-K 1 rs-20171231x10k.htm 10-K 10-K v2

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

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)

Delaware
(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 and telephone number, including area code, of principal executive offices)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒               Accelerated filer ☐               Non-accelerated filer ☐               Smaller reporting company ☐               Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on June 30, 2017 was approximately $5,140,000,000. For purposes of this computation, it is assumed that the shares of voting stock held by Directors and Officers would be deemed to be stock held by affiliates. As of February 23, 2018, 72,830,040 shares of the registrant’s common stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report.

 

 


 

INDEX

 

 

 

    

Page

 

PART I

 

 

Item 1. 

Business

 

1

Item 1A. 

Risk Factors

 

14

Item 1B. 

Unresolved Staff Comments

 

24

Item 2. 

Properties

 

24

Item 3. 

Legal Proceedings

 

24

Item 4. 

Mine Safety Disclosures

 

24

 

PART II

 

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

Item 6. 

Selected Financial Data

 

28

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 8. 

Financial Statements and Supplementary Data

 

46

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

83

Item 9A. 

Controls and Procedures

 

83

Item 9B. 

Other Information

 

83

 

PART III

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

 

85

Item 11. 

Executive Compensation

 

85

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

85

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

 

85

Item 14. 

Principal Accounting Fees and Services

 

85

 

PART IV

 

 

Item 15. 

Exhibits, Financial Statement Schedules

 

86

Item 16. 

Form 10-K Summary

 

87

SIGNATURES 

 

88

 

i


 

FORWARD-LOOKING STATEMENTS

 

Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10‑K, the terms “Company,” “Reliance,” “we,” “our,” and “us” refer to Reliance Steel & Aluminum Co. and all of its subsidiaries that are consolidated in accordance with U.S. generally accepted accounting principles. This Annual Report on Form 10‑K and the information incorporated by reference contain forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also provide oral or written forward-looking information in other materials we release to the public. Our forward‑looking statements may include, but are not limited to, discussions of our industry and end markets, our business strategies and our expectations concerning future demand and metals pricing and our results of operations, margins, profitability, impairment charges, taxes, liquidity, litigation matters and capital resources. In some cases, you can identify forward‑looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, and similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those in the future that are implied by these forward‑looking statements. These risks and other factors include those described in “Risk Factors” (Part I, Item 1A of this Form 10‑K) and “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A). In addition, other factors may affect the accuracy of our forward-looking information. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events and results of operations may vary materially.

 

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason, except as may be required by law. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

 

This Annual Report on Form 10‑K includes registered trademarks, trade names and service marks of the Company and its subsidiaries.

 

 

ii


 

PART I

 

Item 1.  Business

 

We are the largest metals service center company in North America (U.S. and Canada). Our network of metals service centers operates more than 300 locations in 40 states in the U.S. and in 13 other countries (Australia, Belgium, Canada, China, France, India, Malaysia, Mexico, Singapore, South Korea, Turkey, the United Arab Emirates and the United Kingdom). Through this network, we provide metals processing services, or first-stage processing, and distribute a full line of more than 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, to more than 125,000 customers in a broad range of industries. We focus on small orders with quick turnaround and increasing levels of value-added processing. In 2017, our average order size was $1,740, approximately 48% of our orders included value-added processing and approximately 40% of our orders were delivered within 24 hours from receipt of the order. Many of our metals service centers process and distribute only specialty metals. We have grown our international presence selectively to support the globalization of our customers. We generated net sales of $9.72 billion in 2017 and net income attributable to Reliance of $613.4 million.

 

Our primary business strategy is to provide the highest levels of quality and service to our customers in the most efficient operational manner, allowing us to maximize our financial results. Our growth strategy is based on increasing our operating results through organic growth activities and strategic acquisitions that enhance our product, customer and geographic diversification with a focus on higher margin specialty products and value-added processing services. We focus on improving the operating performance at acquired locations by integrating them into our operational model and providing them access to capital and other resources to promote growth and efficiencies. We believe our focused growth strategy of diversifying our products, customers and geographic locations makes us less vulnerable to regional or industry specific economic volatility and somewhat lessens the negative impact of volatility experienced in commodity pricing and cyclicality of our customer end markets, as well as general economic trends. We also believe that our focus on servicing customers with small order sizes and quick turnaround, along with our growth and diversification strategy have been instrumental in our ability to produce industry‑leading operating results among publicly traded metals service center companies in North America.

 

We have one operating segment and one reportable segment, metals service centers. Further information about our reportable segment, including geographic information, appears in Note 16 — “Segment information” of Part II, Item 8 “Financial Statements and Supplementary Data.”

 

Industry Overview

 

Metals service centers acquire carbon steel, aluminum, stainless and alloy steel and other metal products from primary metals producers and then process these materials to meet customer specifications using techniques such as beam, bar, pipe and tube cutting; bending, forming and shaping; coil and flat roll processing; plate and sheet cutting; machining and various other specialized services such as laser cutting, fabricating, and mechanical polishing, among others. Customers purchase from service centers for a variety of reasons, including the ability to obtain value‑added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum order sizes specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus on just-in-time inventory management and materials management outsourcing in the capital goods and related industries. In general, metals service center customers have placed increased emphasis on carrying lower amounts of inventory, especially during declining price environments. We believe that many customers have also reduced their in-house processing capabilities, opting to source processed metal from service centers like us, which has been supportive of our recent capital expenditures and improved gross profit margins. There have been significant advancements in processing equipment in our industry in recent years that have enabled us to provide higher quality products and increase the efficiency of our customers’ manufacturing operations, which has contributed to our improved our gross profit margins.

 

These processing services save our customers time, labor, and expense, reducing their overall manufacturing costs. Specialized metals processing equipment requires high‑volume production to be cost effective. Many manufacturers and their suppliers are not able or willing to invest in the necessary technology, equipment, and warehousing of inventory to efficiently and effectively perform metal processing for their own operations. Accordingly, we believe industry dynamics

1


 

have created a niche in the market for metals service centers. Metals service centers purchase, process, and deliver metals to end‑users in a more efficient and cost‑effective manner than the end‑user could achieve by dealing directly with the primary producer. Service centers comprise the largest customer group for North American mills, buying and reselling almost 50% of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass, bronze and superalloys produced in the United States according to a May 2017 report issued by IBISWorld Inc., a global intelligence publication.

 

We believe that metals service centers are generally less susceptible to market cycles than metals producers because service centers are generally able to pass on all or a portion of increases in metal costs to their customers, unless they are selling to their customers on a fixed‑price contractual basis. We believe that service center companies, like Reliance, that emphasize rapid inventory turnover and minimal contract sales, are generally less vulnerable to changing metals prices than the metals producers. However, fluctuations in metals pricing have a significant impact on our revenue and profit.

 

The metals service center industry is highly fragmented and competitive within localized areas or regions. Many of our competitors operate single, stand‑alone service centers. According to IBISWorld Inc., there are approximately 10,100 metal wholesaling locations operated by more than 7,100 companies in the United States in 2017. The significant number of metals service centers that exist in this fragmented market, along with the consolidation trend continues to create opportunities for us to expand by making acquisitions.

 

According to IBISWorld Inc., the United States metals wholesale industry (which includes metals service centers) is expected to generate revenues of approximately $182.7 billion in 2017, a 10% increase over 2016 revenues of $165.9 billion mainly due to higher metals prices. The five largest U.S. metals service center companies are expected by IBISWorld Inc. to represent just over 10% of the estimated $182.7 billion industry total in 2017. While we remain the largest metals service center company in the United States on a revenue basis, IBISWorld Inc. estimates our 2017 U.S. revenues to account for only about 4.8% of the entire U.S. market, leaving significant opportunity for further strategic growth.

 

History and Overview of Reliance

 

Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939, and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten years of our founding, we had become a full‑line distributor of steel and aluminum, operating a single metals service center in Los Angeles. In the early 1950’s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.

 

In the mid‑1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel or brass and copper, and equipped with automated materials handling and precision cutting equipment specific to the selected metals. In the mid‑1990’s, we began to expand nationally and focused on acquiring well‑run, profitable metals service center companies, and we continue to expand our network, with a focus on providing increased levels of value-added services and specialty products to our customers as opposed to merely distributing metal. We reincorporated in the State of Delaware in 2015. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994.

 

2


 

We continue to execute our growth strategy and have become the largest North American (U.S. and Canada) metals service center company based on revenues, with over 300 locations and 2017 net sales of $9.72 billion. Although we continue to expand the types of metals that we sell and the processing services that we perform, we have not diversified outside of our core business and we strive to consistently perform as the best in our industry. We focus on smaller customers and order sizes with quick turnarounds and have steadily increased the percentage of our orders with processing performed, which reached 48% in 2017, up from our historical level of 40%. We currently operate metals service centers under the following trade names:

 

 

 

 

Trade Name

    

No. of
Locations

Reliance Divisions

 

 

Bralco Metals

 

 

Bralco Metals

 

6

Aerotech

 

1

Affiliated Metals

 

1

Airport Metals (Australia)

 

1

Olympic Metals

 

1

Central Plains Steel Co.

 

1

MetalCenter

 

1

Reliance Metalcenter

 

8

Reliance Steel Company

 

2

Tube Service Co.

 

6

All Metal Services

 

 

All Metal Services Ltd. (China)

 

1

All Metal Services France

 

1

All Metal Services Limited (United Kingdom)

 

5

All Metal Services (Malaysia) Sdn. Bhd.

 

1

Allegheny Steel Distributors, Inc.  

 

1

American Metals Corporation

 

 

American Metals

 

2

American Steel

 

2

Alaska Steel Company

 

3

Haskins Steel Co., Inc.

 

1

Lampros Steel 

 

3

AMI Metals, Inc.

 

 

AMI Metals

 

6

AMI Metals UK, Limited

 

2

AMI Metals Europe (Belgium)

 

1

AMI Metals France

 

1

AMI Metals Aero Services Ankara Havacılık Anonim Şirketi (Turkey)

 

1

Best Manufacturing, Inc.

 

1

CCC Steel, Inc.

 

 

CCC Steel

 

1

IMS Steel Co.

 

1

Chapel Steel Corp. 

 

 

Chapel Steel Corp.

 

5

Chapel Steel Canada, Ltd.

 

1

Chatham Steel Corporation 

 

5

Clayton Metals, Inc.  

 

3

Continental Alloys & Services Inc.

 

 

Continental Alloys & Services

 

4

Continental Alloys & Services, Inc. (Canada)

 

1

Continental Alloys & Services Middle East FZE (Dubai)

 

1

Continental Alloys & Services (Malaysia) Sdn. Bhd.

 

1

Continental Alloys & Services Pte. Ltd. (Singapore)

 

1

3


 

 

 

 

Trade Name

    

No. of
Locations

Crest Steel Corporation 

 

1

Delta Steel, Inc.

 

 

Delta Steel

 

6

Smith Pipe & Steel Company

 

1

Diamond Manufacturing Company

 

 

Diamond Manufacturing 

 

3

Ferguson Perforating Company

 

2

McKey Perforating Co.

 

1

McKey Perforated Products Co.

 

1

Perforated Metals Plus

 

1

Durrett Sheppard Steel Co., Inc.  

 

1

Earle M. Jorgensen Company

 

 

Earle M. Jorgensen

 

31

Earle M. Jorgensen (Malaysia) Sdn. Bhd.

 

1

Encore Metals USA

 

2

Steel Bar

 

1

Feralloy Corporation

 

 

Feralloy

 

3

Acero Prime S. de R.L. de C.V. (60%-owned)

 

4

Feralloy Processing Company (51%-owned)

 

1

GH Metal Solutions, Inc.

 

4

Indiana Pickling and Processing Company (56%-owned)

 

1

Oregon Feralloy Partners (40%-owned)

 

1

Fox Metals and Alloys, Inc.

 

1

Infra-Metals Co.

 

 

Infra-Metals

 

6

Athens Steel

 

1

Infra-Metals / IMS Steel

 

2

Liebovich Bros., Inc.

 

 

Liebovich Steel & Aluminum Company

 

5

Custom Fab Company

 

1

Good Metals

 

1

Hagerty Steel & Aluminum Company

 

2

Metalweb Limited  

 

5

Metals USA, Inc.

 

 

Eagle Steel Products, Inc. (45%-owned)

 

1

Gregor Technologies

 

1

Lynch Metals

 

2

Metals USA

 

24

Ohio River Metal Services

 

1

Port City Metal Services

 

1

The Richardson Trident Company, LLC

 

3

National Specialty Alloys, Inc. 

 

 

National Specialty Alloys

 

3

Aleaciones Especiales de Mexico, S. de R.L. de C.V.

 

1

Northern Illinois Steel Supply Co.

 

1

Pacific Metal Company 

 

6

PDM Steel Service Centers, Inc. 

 

 

PDM Steel Service Centers

 

8

Feralloy PDM Steel Service

 

1

Phoenix Corporation

 

 

Phoenix Metals Company

 

12

Aluminum and Stainless

 

2

4


 

 

 

 

Trade Name

    

No. of
Locations

Precision Flamecutting and Steel, Inc. 

 

1

Precision Strip, Inc.  

 

13

Reliance Metalcenter Asia Pacific Pte. Ltd. (Singapore)

 

1

Reliance Metals Canada Limited

 

 

Earle M. Jorgensen (Canada)

 

5

Encore Metals

 

5

Team Tube

 

5

Service Steel Aerospace Corp.

 

 

Service Steel Aerospace

 

3

Dynamic Metals International

 

1

United Alloys Aircraft Metals

 

1

Siskin Steel & Supply Company, Inc.

 

 

Siskin Steel

 

4

East Tennessee Steel Supply Company

 

1

Sunbelt Steel Texas, Inc. 

 

2

Sugar Steel Corporation 

 

2

Tubular Steel, Inc.

 

 

Tubular Steel

 

6

Metalcraft Enterprises, Inc.

 

1

Valex Corp.

 

 

Valex

 

1

Valex China Co., Ltd.

 

1

Valex Korea Co., Ltd. (95%-owned)

 

1

Viking Materials, Inc. 

 

2

Yarde Metals, Inc. 

 

8

 

Operational Strategy

 

Our executive officers maintain a control environment that is focused on integrity and ethical behavior, establish general policies and operating guidelines and monitor adherence to proper financial controls, while our division managers and subsidiary officers have autonomy with respect to day‑to‑day operations. This balanced yet entrepreneurial management style has enabled us to improve our safety performance and the productivity and profitability of both our acquired businesses and of our existing operations. Key management personnel are eligible for incentive compensation based, in part, on the profitability of their particular division or subsidiary and, in part, on the Company’s overall profitability.

 

Safety is our top priority and an important element of our day-to-day operational focus. We seek to increase profitability through improvements in our customer service, operational efficiencies, pricing discipline, and inventory management as well as by providing increased levels of value-added processing. We continue to adjust our business practices to leverage our size and gain efficiencies which contribute to our profitability. We believe that we have an excellent reputation in the industry and are known for our integrity and the quality and timeliness of our service.

 

Historically, we have expanded through both acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased 63 businesses, including the acquisition of Ferguson Perforating Company in 2017. Our internal growth activities during the last few years, which are supported by our capital expenditures, have been at historically high levels for us and have included opening new facilities, adding to our processing capabilities and relocating existing operations to larger, more efficient facilities. Our investments in processing equipment have allowed us to increase the range of value-added services that we provide to our customers and increase our efficiency, which we believe has contributed to our recent gross profit margin improvements. These investments also differentiate us from our competitors and have allowed us to increase our market share. We will continue to evaluate acquisition opportunities and we expect to continue to grow our business through acquisitions and internal growth initiatives, particularly those that will diversify our products, customer base and geographic locations and increase our sales of specialty products and high margin, value-added processing.

5


 

 

Customers and Markets

 

Our customers purchase from us and other metals service centers to obtain value‑added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum order sizes specified by mills, because those customers require intermittent deliveries over long or irregular time periods, or because those customers require specialized processing services. We believe that metals service centers have also enjoyed an increase in services requested by their customers due to the focus of the capital goods and other manufacturing industries on just‑in‑time inventory management and outsourcing of materials management and metals processing. Due to technology advancements in metals processing equipment, metals service centers that have invested in new processing equipment are able to provide higher quality levels to their customers.

 

We have more than 125,000 customers in a variety of industries, including general manufacturing, non‑residential construction (including infrastructure), transportation (rail, truck trailer and shipbuilding), aerospace and defense, energy (oil and gas), electronics and semiconductor fabrication, and heavy industry (agricultural, construction and mining equipment). We also service the auto industry, primarily through our toll processing operations where we do not take ownership of the metal.

 

Although we sell directly to many large original equipment manufacturer (“OEM”) customers, the majority of our sales are to small machine shops and fabricators, in small quantities with frequent deliveries, helping them manage their working capital and credit needs more efficiently. Our metals service centers wrote and delivered over 5,567,000 orders during 2017 or an average of 22,150 per day, with an average price of approximately $1,740 per order. Most of our metals service center customers are located within a 200‑mile radius of the Reliance metals service center serving them. The proximity of our service centers to our customers helps us provide just‑in‑time delivery and increases the likelihood of repeat business. In 2017, approximately 97% of our orders were from repeat customers. With our fleet of approximately 1,700 trucks (some of which are leased), we are able to service many smaller customers and provide quick turnaround deliveries. We believe that maintaining our own fleet of trucks and drivers provides a competitive advantage in the current environment where it is becoming increasingly more difficult to contract with third party carriers. Moreover, our computerized order entry systems and flexible production scheduling enable us to meet customer requirements for short lead times and just‑in‑time delivery. We believe that our long‑term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining and expanding these relationships.

 

Our acquisitions in recent years have increased our international exposure from both a customer and physical location perspective. In addition, we have built and opened international locations in recent years to service specific industries, typically to support existing key customers that are operating in those international markets. Net sales of our international locations (based on where the shipments originated) accounted for approximately 9% of our consolidated 2017 net sales, or $873.7 million. However, our net sales to international customers (based on the shipping destination) were approximately 11% of our consolidated 2017 net sales or $1.1 billion, with approximately 23% of these sales, or $258.2 million, to Canadian customers.

 

Customer demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in a wide variety of industries, we believe that we are able to somewhat mitigate earnings volatility. In addition, many of our customers are small job shops and fabricators who also have a diverse customer base and the versatility to service different end markets when an existing market slows. Given our business model and focus on small, quick turnaround orders, we primarily operate in the spot market for both the purchase and sale of our products. As we have limited contractual business, this enables us to better pass on higher metal prices to our customers and maintain consistency in our gross profit margin.

 

Due to our focus on small orders, decentralized operating structure and the diversity of the markets we serve, customer concentrations are not significant. Our largest customer represented only 1.1% of our net sales in 2017. In 2017, we had only 23 customers with sales greater than $25 million.

6


 

 

The geographic breakout of our sales based on the location of our metals service center facilities in each of the three years ended December 31 was as follows:

 

 

 

 

 

 

 

 

 

 

 

2017

 

    

2016

 

    

2015

 

Midwest

32

%

 

32

%

 

31

%

West/Southwest

22

%

 

22

%

 

23

%

Southeast

18

%

 

17

%

 

18

%

International

 9

%

 

 9

%

 

 8

%

Mid-Atlantic

 6

%

 

 7

%

 

 7

%

Northeast

 6

%

 

 6

%

 

 6

%

Pacific Northwest

 4

%

 

 4

%

 

 4

%

Mountain

 3

%

 

 3

%

 

 3

%

Total

100

%

 

100

%

 

100

%

 

See Note 16 — “Segment information” of Part II, Item 8 “Financial Statements and Supplementary Data” for further information on U.S. and foreign revenues and assets.

 

 

 

 

 

 

 

 

 

 

Suppliers

 

We primarily purchase our inventory from the major domestic metals producers, which we also refer to as mills. We do, however, also purchase limited amounts of certain products from foreign producers. We have multiple suppliers for all of our products. Our major suppliers of domestic carbon steel products include AK Steel; ArcelorMittal; California Steel Industries, Inc.; Commercial Metals Company; Evraz NA; Gerdau; NLMK USA; Nucor Corporation; Steel Dynamics, Inc.; SSAB; United States Steel Corporation; and Zekelman Industries. AK Steel, Allegheny Technologies Incorporated, North American Stainless, Outokumpu and Universal Stainless are our major suppliers of stainless steel products. We are a recognized distributor for various major aluminum companies, including Aleris International, Inc.; Arconic Inc.; Constellium N.V.; Hydro; and Kaiser Aluminum Corp. Our major suppliers of alloy products include ArcelorMittal; Carpenter Technologies; Gerdau; Nucor Corporation; and TimkenSteel Corporation.

 

Because of our total volume of purchases and our long‑term relationships with our suppliers, we believe that we are generally able to purchase inventory at the best prices offered by our suppliers. We believe that these relationships provide us an advantage in our ability to source product and have it available for our customers in accelerated timeframes when needed, and also allows us to more efficiently manage our inventory. We believe that we are not dependent on any one supplier for our metal inventory. We believe both our size and our long-term relationships with our suppliers continue to be important because mill consolidation has reduced the number of suppliers.

 

Backlog

 

Because of the just‑in‑time delivery and the short lead‑time nature of our business, we do not believe information on our backlog of orders is meaningful to an understanding of our business.

 

Capital Expenditures

 

We maintained our focus on internal growth in 2017 by opening new facilities, building or expanding existing facilities and adding processing equipment with total capital expenditures of $161.6 million, with the majority growth-related. Our 2018 capital expenditure budget is our largest ever at approximately $225 million, much of which is again related to internal growth activities comprised of purchases of equipment and new facilities along with expansions of existing facilities and also includes about $40 million of projects that were included in our 2017 budget, but not completed. This reflects our confidence in our long‑term prospects; however, we will continue to evaluate and execute each growth project and consider the economic conditions and outlook at the time of investment. We estimate our maintenance capital expenditures at approximately $80 to $90 million annually, which allows us to significantly reduce our capital expenditures if economic conditions warrant a more conservative approach to strategic allocation.

 

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Products and Processing Services

 

We provide a wide variety of processing services to meet our customers’ specifications and deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of products in inventory, and believe this differentiates us from all other North American service centers. Approximately half of our orders do not require extensive or specialized processing allowing delivery to the customer within 24 hours of receiving the order. This provides a competitive advantage to us, and, for the remainder of our orders we typically have shorter lead times than our competitors given our decentralized structure and investments in processing equipment. Our product mix has become more diverse mainly as a result of our targeted growth strategy to acquire companies with specialized inventory and provide increased levels of value-added processing services. In addition, we have invested over $1 billion in capital expenditures in the six-year period ended December 31, 2017, with approximately 50% spent on processing equipment. We have increased our investments in processing equipment due to our existing and potential customers requesting higher levels of value-added processing, which has contributed to increases in our profitability. We currently perform processing services for 48% of our orders compared to our historical level of 40%. We believe our investments in state-of-the-art processing equipment and focus on maintaining pricing discipline related to our processing services were significant contributors to our substantial increases in gross profit margin over the past few years. We also believe our enhanced processing capabilities have allowed us to increase our market share, especially for higher-margin products and services. Flat‑rolled carbon steel products (i.e., hot‑rolled, cold‑rolled and galvanized steel sheet and coil), which generally have the most volatile and competitive pricing, accounted for only 15% of our 2017 sales.

 

8


 

Our sales dollars by product type as a percentage of total sales in each of the three years ended December 31 were as follows:

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

 

 

 

11

%  

10

%  

12

%  

carbon steel plate

 

10

%  

10

%  

10

%  

carbon steel structurals

 

10

%  

10

%  

 8

%  

carbon steel tubing

 

 7

%  

 6

%  

 6

%  

hot-rolled steel sheet and coil

 

 6

%  

 7

%  

 7

%  

carbon steel bar

 

 5

%  

 6

%  

 5

%  

galvanized steel sheet and coil

 

 3

%  

 3

%  

 4

%  

cold-rolled steel sheet and coil

Carbon Steel

52

%  

52

%  

52

%  

 

 

 

 

 

 

 

 

 

 

 7

%  

 7

%  

 6

%  

heat-treated aluminum plate

 

 6

%  

 6

%  

 6

%  

aluminum bar and tube

 

 4

%  

 5

%  

 5

%  

common alloy aluminum sheet and coil

 

 1

%  

 1

%  

 1

%  

common alloy aluminum plate

 

 1

%  

 1

%  

 1

%  

heat-treated aluminum sheet and coil

Aluminum

19

%  

20

%  

19

%  

 

 

 

 

 

 

 

 

 

 

 6

%  

 6

%  

 6

%  

stainless steel bar and tube

 

 6

%  

 6

%  

 6

%  

stainless steel sheet and coil

 

 2

%  

 2

%  

 2

%  

stainless steel plate

Stainless Steel

14

%  

14

%  

14

%  

 

 

 

 

 

 

 

 

 

 

 4

%  

 3

%  

 4

%  

alloy bar and rod

 

 1

%  

 1

%  

 2

%  

alloy tube

 

 1

%  

 1

%  

 1

%  

alloy plate, sheet and coil

Alloy

 6

%  

 5

%  

 7

%  

 

 

 

 

 

 

 

 

 

 

 4

%  

 4

%  

 3

%  

toll processing —  aluminum, carbon steel and stainless steel (1)

 

 5

%  

 5

%  

 5

%  

miscellaneous, including brass, copper, titanium, manufactured parts and scrap

Other

 9

%  

 9

%  

 8

%  

 

 

 

 

 

 

 

 

 

Total

100

%  

100

%  

100

%  

 


(1) Includes revenues for logistics services provided by our toll processing companies. 

 

We are not dependent on any particular customer group or industry because we process and distribute a variety of metals. This diversity of product type and material reduces our exposure to fluctuations or other weaknesses in the financial or economic stability of particular customers or industries. We are also less dependent on any particular suppliers as a result of our product diversification.

 

For sheet and coil products, we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between 0.015 and 0.25 inches thick, and rolled into 3‑to-20 ton coils. The size and weight of these coils require specialized equipment to move and process the material into smaller sizes and various products. Many of the other products that we carry also require specialized equipment for material handling and processing. We believe few of our customers have the capability to process the metal into the desired sizes or the capital available to acquire the necessary equipment.

 

We believe that few metals service centers offer the broad range of processing services and metals that we provide. In addition to a focus on growing our revenues from specialty products, we have also enhanced the level of value‑added

9


 

processing services we provide through recent acquisitions and significant investments in new equipment over the past few years. For example, we have made significant investments in facilities and equipment due to the increased demand for our products sold to the aerospace market and toll processing aluminum for the automotive industry.

 

After receiving an order, we enter it into one of our computerized order entry systems, select appropriate inventory and schedule processing to meet the specified delivery date. In 2017, we delivered approximately 40% of our orders within 24 hours of the customer placing the order with us. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each product that we purchase to the fullest extent practicable.

 

In 2017, we performed processing services for approximately 48% of our sales orders. Our primary processing services range from cutting, leveling or sawing to more complex processes such as machining or electropolishing. Throughout our service centers we perform most processes provided in the industry, without encroaching upon the services performed by our customers. As part of our growth strategy, we have been expanding into higher value‑added services, including certain fabrication processes as requested by our customers.

 

We generally only process specific metals to non‑standard sizes pursuant to customer purchase order specification. In addition, we typically acquire standard size and grade products that can be processed into many different sizes to meet the needs of many different customers. We do not maintain a significant inventory of finished products, but we carry a wide range of metals to meet our customers’ short lead time and just‑in‑time delivery requirements. Our metals service centers maintain inventory and equipment selected to meet the needs of that facility’s customers. We work with our customers to understand their needs and identify areas where we can provide additional value, increasing our importance to them.

 

Sales and Marketing

 

As of December 31, 2017, we had approximately 2,090 sales personnel located in 44 states in the U.S. and 13 other countries providing sales and marketing services throughout each of those areas. Our sales personnel market and sell our products and services and we believe that our sales force has extensive product, service, market and customer knowledge. Sales personnel are organized by division or subsidiary and are divided into two groups. Outside sales personnel travel throughout a specified geographic territory and maintain relationships with our existing customers and develop new customers. Inside sales personnel remain at the facilities to price and write orders. Outside sales personnel generally receive incentive compensation based on the gross profit from their particular geographic territories. Inside sales personnel generally receive incentive compensation based on the gross profit and/or pre‑tax profit of their particular location.

 

Our business is relationship based and because of that, we operate under many different trade names. We acquire well-run businesses with strong customer relationships and solid reputations within the marketplace. Because of this, we find value in the acquired trade name and continue to use the business name and maintain the customer relationships.

 

Competition

 

The metals service center industry is highly fragmented and competitive. We have numerous competitors in each of our product lines and geographic locations, and competition is most frequently local or regional. Our domestic service center competitors are generally smaller than we are, but we also face strong competition from national, regional and local independent metals distributors and the producers themselves, some of which have greater resources than we do. In their May 2017 report on the metals wholesaling industry, IBISWorld Inc. estimated that in 2017 there were approximately 10,100 metal wholesale locations in the United States operated by approximately 7,100 companies. Nevertheless, the five largest U.S. metals service center companies are expected to represent just over 10% of the estimated industry revenue in 2017. IBISWorld Inc. estimates our 2017 U.S. revenues to account for only about 4.8% of the entire U.S. market. We are the largest North American (U.S. and Canada) metals service center company on a revenue basis.

 

We compete with other companies on price, service, quality, processing capability and availability of products and services. We maintain relationships with our major suppliers at the executive and local levels. We believe that this division of responsibility has increased our ability to obtain competitive prices of metals by leveraging our total size and to provide more responsive service to our customers by allowing our local management teams to make the purchasing decisions. In addition, we believe that the size of our inventory, the diversity of metals products we have available, and the wide variety

10


 

of processing services we provide distinguish us from our competition. We believe our competitors are generally unable to offer the same high quality products and services we provide using state-of-the-art processing equipment as they do not have the financial ability or risk tolerance to grow their businesses at the same rate as Reliance. We believe we have increased our market share during recent years due to our strong financial condition, the high quality of products and services we are able to offer as a result of our significant investments in our acquired businesses, facilities and equipment, as well as our continued focus on small order sizes with quick turnaround.

 

Quality Control

 

Procuring high quality metal from suppliers on a consistent basis is critical to our business. We have instituted strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. In certain instances, we perform physical and chemical analyses on selected raw materials, typically through a third party testing lab, to verify that mechanical and dimensional properties, cleanliness and surface characteristics meet our requirements and our customers’ specifications. We also conduct certain analyses of surface characteristics on selected processed metal before delivery to the customer. We believe that maintaining high standards for accepting metals ultimately results in reduced return rates from our customers.

 

We maintain various quality certifications throughout our operations. Approximately 55% of our operating locations are ISO 9001:2008 or ISO 9001:2015 certified. Many of our locations maintain additional certifications specific to the industries they serve, such as aerospace, auto, nuclear, and others, including certain international certifications.

 

Systems

 

A common financial reporting system, as well as certain other accounting, tax and human resources systems are used company‑wide. However, we maintain various transactional software applications across our operations that meet the individual needs of those operations. Generally, these localized systems provide information in real time, such as inventory availability, location and cost and may be customized with features to accommodate the products the respective operations carry and services they provide, automated equipment interfaces, or other specialized requirements. With this information, our marketing and sales personnel can respond to our customers’ needs more efficiently and more effectively. Many of our companies also provide online access to our existing customers to allow them to interact with us more efficiently, and also provide the ability for potential customers to make inquiries and place orders.

 

Government Regulation

 

Our metals service centers are subject to many foreign, federal, state and local requirements to protect the environment, including hazardous waste disposal and underground storage tank regulations. The only hazardous substances that we generally use in our operations are lubricants, cleaning solvents and petroleum for fueling our trucks. We pay state‑certified private companies to haul and dispose of our hazardous waste.

 

Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and related regulations, which, among other requirements, establish noise, dust and safety standards. We maintain comprehensive health and safety policies and encourage our employees to follow established safety practices. Safety of our employees and others is critical to our success. We continue to expand and improve our internal safety resources, which has contributed positively to our safety metrics and financial results. We encourage social well‑being by instituting these high quality labor, health and safety standards. We do not anticipate that continued compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition.

 

We are subject to the conflict mineral provisions of the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010. We are required to undertake due diligence, disclose and report whether the products we sell originate from the Democratic Republic of Congo and adjoining countries. We verify with our suppliers the origins of all metals used in our products.

 

11


 

We sell metals to foreign customers and otherwise operate abroad, subjecting us to various countries’ trade regulations concerning the import and export of materials and finished products. Our operations are subject to the laws and regulations of the jurisdictions in which we conduct our business that seek to prevent corruption and bribery in the marketplace, including the United States’ Foreign Corrupt Practices Act (the “FCPA”) and the United Kingdom’s Bribery Act 2010. We have developed and implemented company‑wide export and anti‑corruption policies designed to provide our employees clear statements of our compliance requirements and to ensure compliance with applicable export and anti‑corruption regulations. For information about risks related to government regulation, please see the risk factors set forth under the caption Item 1A. “Risk Factors” including the Risk Factors captioned “We are subject to various environmental, employee safety and health and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures;” “We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations;” and “Our international operations continue to expand, exposing us to additional risks.”

 

Environmental

 

Some of the properties we own or lease are located in industrial areas with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. In addition, we are currently involved with a certain environmental remediation project related to activities at former manufacturing operations of Earle M. Jorgensen Company (“EMJ”), our wholly owned subsidiary, that were sold many years prior to Reliance’s 2006 acquisition of EMJ. Although the potential cleanup costs could be significant, EMJ maintained insurance policies during the time they owned the manufacturing operations that have covered substantially all of our expenditures related to this matter to date, and are expected to continue to cover the majority of the related costs. We do not expect that these obligations will have a material adverse impact on our financial position, results of operations or cash flows.

 

We believe that all scrap metal produced by our operations is recycled by the independent scrap metal companies and producers to whom we sell our scrap metal. We continue to evaluate and implement energy conservation and other initiatives to reduce pollution and improve our environmental impact. Enactment of more stringent environmental regulations could have an adverse impact on our financial results.

 

Although we have implemented policies and procedures to comply with these regulations, we cannot guarantee that we will not incur any violations and resulting penalties from such activity.

 

Corporate Responsibility

 

Sustainability

 

We are committed to mitigating the impact our products and operations have on the environment. As an operator of metals service centers, our day-to-day business consists of the sale, distribution and processing of a broad variety of metal products sourced from numerous primary metal producers. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first‑stage” processing, which does not require significant amounts of energy or toxic or hazardous materials as we are simply cutting the metal to size. Our operations, by their nature, do not emit significant amounts of carbon dioxide or other greenhouse gases or have a significant impact on the environment.

 

As part of our commitment to environmental sustainability, we:

 

·

purchase significant volumes of metal produced in electric arc furnaces that consume recycled material;

 

·

sell scrap material generated in our operations to recyclers;

 

·

use propane fuel to operate forklifts and have installed natural and energy efficient lighting in many of our operations; and

 

12


 

·

utilize energy efficient diesel tractors that consume less fuel and reduce emissions for the majority of our trucking fleet.

 

Community Programs

 

Reliance is committed to investing in and enriching the communities in which we live and work. We support a variety of organizations and community programs including:

 

·

Veterans support  We are supporters of a non-profit organization that provides veterans and transitioning services members with advanced manufacturing training and industry-recognized certification for careers in welding, machining, and fabrication at no cost to them. Since 2013, Reliance has partnered with this organization through financial sponsorship, donations of metals for their training courses, and hiring this organization’s graduates. For the past four years, we have also participated in a national program focused on supporting enlisted members of the Armed Forces and their families.

 

·

Reliance Cares  In 2017, we launched an employee relief fund to support our workforce of approximately 14,900 individuals across 40 states and 13 countries outside of the U.S. (“Reliance Cares”). Reliance Cares is available to any of our employees impacted by a natural disaster. In the wake of Hurricanes Harvey and Irma, in August and September 2017, we provided financial assistance to 135 employees through our Immediate Response Program. We further funded 27 grants to help our employees’ rebuilding efforts.

 

·

Local Community Organizations  Reliance encourages our subsidiaries and divisions to engage in and initiate events serving their communities and their employees. To commend our companies for their civic contributions, Reliance matches the fundraising efforts of our subsidiaries and divisions and supports volunteer efforts by our employees.

 

Employees

 

As of December 31, 2017, we had approximately 14,900 employees. Approximately 12% of our employees are covered by collective bargaining agreements that expire at various times over the next eight years. Approximately 600 employees are covered by 23 different collective bargaining agreements that expire in 2018. We have entered into collective bargaining agreements with 41 union locals at 53 of our locations. These collective bargaining agreements have not had a material impact either favorably or unfavorably on our revenues or profitability at our various locations. We aim to always maintain excellent relations with our employees and have never experienced a significant work stoppage. Over the years we have experienced minor work stoppages by our employees at certain of our locations, but due to the small number of employees and the short time periods involved, these stoppages have not had a material impact on our operations.

 

Seasonality

 

Some of our customers are in seasonal businesses, especially customers in the construction industry and related businesses. Our overall operations have not shown any material seasonal trends as a result of our geographic, product and customer diversity. Typically, revenues in the months of July, November and December have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from vacation and extended holiday closures at some of our customers. Reduced shipping days also have a significant impact on our profitability in any particular period. We cannot predict whether period-to-period fluctuations will be consistent with historical patterns. Results of any one or more quarters are therefore not necessarily indicative of annual results.

 

Available Information

 

We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Exchange Act. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers, including our Company, that file reports electronically with the SEC. The public can obtain any reports that we file with the SEC at http://www.sec.gov. You may also read and copy any document we file at

13


 

the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

Our Investor Relations website is located at http://investor.rsac.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available through our website as soon as reasonably practical after we electronically file or furnish the reports to the SEC. We encourage investors to visit our website. 

 

Item 1A.  Risk Factors

 

Set forth below are the risks that we believe are material to our investors. Our business, results of operations and financial condition may be materially adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business.

 

Risks Related to Our Business and Industry

 

The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.

 

We purchase large quantities of aluminum, carbon, alloy and stainless steel and other metals, which we sell to a variety of customers. The costs to us for these metals and the prices that we charge customers for our products may change depending on many factors outside of our control, including general economic conditions (both domestic and international), competition, production levels, raw material costs, customer demand levels, import duties and other trade restrictions, currency fluctuations and surcharges imposed by our suppliers. We attempt to pass cost increases on to our customers with higher selling prices but we may not always be able to do so, particularly when the cost increases are not demand driven. When metal prices decrease, we may not be able to replace our higher cost inventory with the lower cost metal at a rate that would allow us to maintain a consistent gross profit margin, which would reduce our profitability during that interim period.

 

Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability and related pricing, metals consumption, import levels into the U.S., and the strength of the U.S. dollar relative to other currencies. Future changes in global general economic conditions or in production, consumption or export of metals could cause fluctuations in metal prices globally, which could adversely affect our profitability and cash flows. We generally do not enter into long‑term agreements with our suppliers or hedging arrangements that could lessen the impact of metal price fluctuations.

 

We maintain substantial inventories of metal to accommodate the short lead times and delivery requirements of our customers. Our customers typically purchase products from us pursuant to purchase orders and typically do not enter into long‑term purchase agreements or arrangements with us. Accordingly, we purchase metal in quantities we believe to be appropriate to satisfy the anticipated needs of our customers based on information derived from customers, market conditions, historic usage and industry research. Commitments for metal purchases are generally at prevailing market prices in effect at the time orders are placed or at the time of shipment. During periods of rising prices for metal, we may be negatively impacted by delays between the time of increases in the cost of metals to us and increases in the prices that we charge for our products if we are unable to pass these increased costs on to our customers. In addition, when metal prices decline, this could result in lower selling prices for our products and, as we use existing inventory that we purchased at higher metal prices, lower gross profit margins. Consequently, during periods in which we sell this existing inventory, the effects of changing metal prices could adversely affect our operating results.

 

Our business could be adversely affected by declines in economic activity.

 

Demand for our products and services is affected by a number of general economic factors. A decline in economic activity in the U.S. and international markets in which we operate could materially affect our financial condition and results of operations. During the most recent U.S. economic recession, both demand for our products and pricing levels declined

14


 

rapidly and significantly. In addition to reducing our direct business activity, many of our customers were not able to pay us amounts when they became due, further affecting our financial condition and results of operations. An economic downturn in the markets we serve may result in reductions in sales and pricing of our products, which could have a material adverse effect on our potential earnings and future results of operations.

 

Currency fluctuations and changes in the worldwide balance of supply and demand could negatively impact our profitability and cash flows.

 

Significant currency fluctuations in the United States or abroad could negatively impact our cost of metals and the pricing of our products. A decline in the U.S. dollar relative to foreign currencies may result in increased prices for metals and metal products in the United States and reduce the amount of metal imported into the U.S. as imported metals become relatively more expensive. We may not be able to pass these increased costs on to our customers. If the value of the U.S. dollar improves relative to foreign currencies, this may result in increased metal being imported into the U.S., which in turn may pressure existing domestic prices for metal. This could also occur if global economies are weaker than the U.S. economy, creating a significant price spread between the U.S. and foreign markets.

 

We operate in an industry that is subject to cyclical fluctuations and any downturn in general economic conditions or in our customers’ specific industries could negatively impact our profitability and cash flows.

 

The metals service center industry is cyclical and impacted by both market demand and metals supply. Periods of economic slowdown or recession in the United States or other countries, or the public perception that these may occur, could decrease the demand for our products and adversely affect our pricing. If either demand or pricing were to decline from the current levels, this could reduce our profitability and cash flows.

 

We sell many products to industries that are cyclical, such as the non‑residential construction, semiconductor, energy, aerospace and heavy equipment industries. Although many of our direct sales are to sub‑contractors or job shops that may serve many customers and industries, the demand for our products is directly related to, and quickly impacted by, demand for the finished goods manufactured by customers in these industries, which may change as a result of changes in the general U.S. or worldwide economy, domestic exchange rates, energy prices or other factors beyond our control. As a recent example, the significant decline in oil prices experienced late in 2014 that continued through 2016 negatively impacted our sales to the energy market.

 

We compete with a large number of companies in the metals service center industry, and, if we are unable to compete effectively, our profitability and cash flows may decline.

 

We compete with a large number of other general-line distributors and processors, and specialty distributors in the metals service center industry. Competition is based principally on price, inventory availability, timely delivery, customer service, quality and processing capabilities. Competition in the various markets in which we participate comes from companies of various sizes, some of which have more established brand names in the local markets that we serve. These competitors may be better able to withstand adverse changes in conditions within our customers’ industries and may have greater operating and financial flexibility than we have. To compete for customer sales, we may lower prices or offer increased services at a higher cost, which could reduce our profitability and cash flows. Rapidly declining prices and/or demand levels may escalate competitive pressures, with service centers selling at substantially reduced prices, and sometimes at a loss, in an effort to reduce their high cost inventory and generate cash. Currently elevated levels of import material into the U.S. has increased competition between metals service centers as supply exceeds demand. These competitive pressures could further intensify if demand and particularly pricing decline significantly from current levels. Any increased and/or sustained competitive pressure could cause our share of industry sales to decline along with our profitability and cash flows.

 

If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales.

 

We have few long‑term contracts to purchase metals. Therefore, our primary suppliers of carbon steel, alloy steel, stainless steel, aluminum or other metals could curtail or discontinue their delivery of these metals to us in the quantities

15


 

we need with little or no notice. Our ability to meet our customers’ needs and provide value‑added inventory management services depends on our ability to maintain an uninterrupted supply of high quality metal products from our suppliers. If our suppliers experience production problems, lack of capacity or transportation disruptions, the lead times for receiving our supply of metal products could be extended and the cost of our inventory may increase. If, in the future, we are unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our customary suppliers, we may not be able to obtain these metals from acceptable alternative sources at competitive prices to meet our delivery schedules. Even if we do find acceptable alternative suppliers, the process of locating and securing these alternatives may be disruptive to our business, which could have an adverse impact on our ability to meet our customers’ needs and reduce our profitability and cash flows. In addition, if a significant domestic supply source is discontinued and we cannot find acceptable domestic alternatives, we may need to find foreign sources of supply. Using foreign sources of supply could result in longer lead times, increased price volatility, less favorable payment terms, increased exposure to foreign currency movements and certain tariffs and duties and require greater levels of working capital. Alternative sources of supply may not maintain the quality standards that are in place with our current suppliers that could impact our ability to provide the same quality of products to our customers that we have provided in the past, which could cause our customers to move their business to our competitors or to file claims against us, and such claims may be more difficult to pass through to foreign suppliers.

 

There has been significant consolidation at the metal producer level both globally and within the U.S. This consolidation has reduced the number of suppliers available to us, which could result in increased metals costs to us that we may not be able to pass on to our customers and may limit our ability to obtain the necessary metals to service our customers. The number of available suppliers may be further reduced if the general economy enters into another recession. Lower metal prices and lower demand levels may cause certain mills to reduce their production capacity and, in that case, the mill may operate at a loss, which could cause one or more mills to discontinue operations if the losses continue over an extended period of time or if the mill cannot obtain the necessary financing to fund its operating costs.

 

We rely upon our suppliers as to the specifications of the metals we purchase from them.

 

We rely on mill certifications that attest to the physical and chemical specifications of the metal received from our suppliers for resale and generally, consistent with industry practice, we do not undertake independent testing of such metals unless independent tests are required by customers. We rely on customers to notify us of any metal that does not conform to the specifications certified by the supplying mill. Although our primary sources of products have been domestic mills, we have and will continue to purchase product from foreign suppliers when we believe it is appropriate. In the event that metal purchased from domestic suppliers is deemed to not meet quality specifications as set forth in the mill certifications or customer specifications, we generally have recourse against these suppliers for both the cost of the products purchased and possible claims from our customers. However, such recourse will not compensate us for the damage to our reputation that may arise from sub‑standard products and possible losses of customers. Moreover, there is a greater level of risk that similar recourse will not be available to us in the event of claims by our customers related to products from foreign suppliers that do not meet the specifications set forth in the mill certifications. In such circumstances, we may be at greater risk of loss for claims for which we do not carry, or carry insufficient, insurance.

 

Our insurance coverage, customer indemnifications or other liability protections may be unavailable or inadequate to cover all of our significant risks or our insurers may deny coverage of or be unable to pay for material losses we incur, which could adversely affect our profitability and overall financial position.

 

We endeavor to obtain insurance agreements from financially solid, highly rated counterparties in established markets to cover significant risks and liabilities. Not every risk or liability can be insured, and for risks that are insurable, the policy limits and terms of coverage reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Even if insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us. Disputes with insurance carriers, including over policy terms, reservation of rights, the applicability of coverage (including exclusions), compliance with provisions (including notice) and/or the insolvency of one or more of our insurers may significantly affect the amount or timing of recovery.

 

In some circumstances we may be entitled to certain legal protections or indemnifications from our customers through contractual provisions, laws, regulations or otherwise. However, these protections are not always available, are typically

16


 

subject to certain terms or limitations, including the availability of funds, and may not be sufficient to cover all losses or liabilities incurred.

 

If insurance coverage, customer indemnifications and/or other legal protections are not available or are not sufficient to cover our risks or losses, it could have a material adverse effect on our financial position, results of operations and/or cash flows.

 

An increase in delinquencies or net losses of customers could adversely affect our results.

 

Inherent in the operation of our business is the credit risk associated with our customers. The creditworthiness of each customer and the rate of delinquencies and net losses on customer obligations are directly impacted by several factors, including relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices and political events. Any increase in delinquencies and net losses on customer obligations could have a material adverse effect on our earnings and cash flows. In addition, although we evaluate and adjust allowances for credit losses related to past due and non-performing receivables on a regular basis, adverse economic conditions or other factors that might cause deterioration of the financial health of our customers could change the timing and level of payments received and thus necessitate an increase in our estimated losses, which could also have a material adverse effect on our earnings and cash flows.

 

If we do not successfully implement our growth strategy, our ability to grow our business could be impaired.

 

We may not be able to identify suitable acquisition candidates or successfully complete any acquisitions or integrate any other businesses into our operations. If we cannot identify suitable acquisition candidates or are otherwise unable to complete acquisitions, we may not be able to continue to grow our business as expected and, if we cannot successfully integrate these businesses, we may incur increased or redundant expenses. Moreover, any additional indebtedness we incur to pay for these acquisitions could adversely affect our liquidity and financial condition.

 

We have invested a significant amount of capital in new locations and new processing capabilities. We may not continue to identify sufficient opportunities for internal growth to be able to sustain growth at similar levels. In addition, we may not realize the expected returns from these investments.

 

Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of each transaction.

 

Since our initial public offering in September 1994, we have successfully purchased 63 businesses. We continue to evaluate acquisition opportunities and expect to continue to grow our business through acquisitions in the future. Risks we may encounter in acquisitions include:

 

·

the acquired company may not perform as anticipated, which could result in an impairment charge or otherwise impact our results of operations;

 

·

we may not realize the anticipated increase in our revenues if a larger than predicted number of customers decline to continue purchasing products from us;

 

·

we may have to delay or not proceed with a substantial acquisition if we cannot obtain the necessary funding to complete the acquisition in a timely manner;

 

·

we may significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition or assume existing debt of an acquired company, which, among other things, may result in a downgrade of our credit ratings;

 

·

we may have multiple and overlapping product lines that may be offered, priced and supported differently, which could cause our gross profit margin to decline;

 

17


 

·

we may have increased inventory exposure for a short time period if the acquired company has significant amounts of material on order;

 

·

our relationship with current and new employees, customers and suppliers could be impaired;

 

·

our due diligence process may fail to identify risks that could negatively impact our financial condition;

 

·

we may lose anticipated tax benefits or have additional legal or tax exposures if we have prematurely or improperly combined entities;

 

·

we may face contingencies related to product liability, intellectual property, financial disclosures, environmental issues, violations of regulations/policies, tax positions and accounting practices or internal controls;

 

·

the acquisition may result in litigation from terminated employees or third parties;

 

·

our management’s attention may be diverted by transition or integration issues;

 

·

higher than expected investments may be required to implement necessary compliance processes and related systems, including IT systems, accounting systems and internal controls over financial reporting;

 

·

we may pay more than the acquired company is worth;

 

·

we may be unable to obtain timely approvals from governmental authorities under competition and antitrust laws; and

 

·

we may undertake acquisitions financed in part through public offerings or private placements of debt or equity securities, or other arrangements. Such acquisition financing could result in a decrease in our earnings and adversely affect other leverage measures. If we issue equity securities or equity-linked securities, the issued securities may have a dilutive effect on the interests of the holders of our common stock.

 

These factors could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger acquisition or a number of acquisitions in any short period of time.

 

In addition, most of the acquisition agreements we have entered into require the former owners to indemnify us against certain liabilities related to the operation of those companies before we acquired them. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. Similarly, the purchasers of our non-core businesses may from time to time agree to indemnify us for operations of such businesses after the closing. We cannot be assured that any of these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our consolidated results of operations, financial condition and cash flows.

 

We are a decentralized company, which presents certain risks.

 

With a diverse geographic footprint in both North America and internationally, we believe our decentralized structure has catalyzed our growth and enabled us to remain responsive to opportunities and to our customers’ needs, it necessarily places significant control and decision‑making authority and accountability in the hands of local management. Because we are decentralized, we may be slower to detect compliance-related problems (e.g., a rogue employee undertaking activities that are prohibited by applicable law or by our internal policies) and “company‑wide” business initiatives, such as the integration of disparate information technology systems, are often more challenging and costly to implement than they would be in a more centralized environment. Depending on the nature of the problem or initiative in question, such failure could materially adversely affect our business, financial condition or results of operations.

 

18


 

As a decentralized business, we depend on both senior management and our key operating employees. If we are unable to attract and retain these individuals, our ability to operate and grow our business may be adversely affected.

 

Because of our decentralized operating style, we depend on the efforts of our senior management, including our President and Chief Executive Officer, Gregg J. Mollins, our Senior Executive Vice President and Chief Financial Officer, Karla Lewis, our Executive Vice President and Chief Operating Officer, James Hoffman and other senior management, as well as our key operating employees. We may not be able to retain these individuals or attract and retain additional qualified personnel when needed. We do not have employment agreements with any of our corporate officers or most of our key employees, so they may have less of an incentive to stay with us when presented with alternative employment opportunities. The compensation of our officers and key employees is heavily dependent on our financial performance and in times of reduced financial performance this may cause our employees to seek employment opportunities that provide a more stable compensation structure. The loss of any key officer or employee will require remaining officers and employees to direct immediate and substantial attention to seeking and training a replacement. Our inability to retain members of our senior management or key operating employees or to find adequate replacements for any departing key officer or employee on a timely basis could adversely affect our ability to operate and grow our business.

 

We could fail to maintain effective internal control over financial reporting.

 

The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. These limitations include, among others, the possibility of human error, inadequacy or circumvention of controls and fraud. If we do not maintain effective internal control over financial reporting or design and implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we might fail to timely detect any misappropriation of corporate assets or inappropriate allocation or use of funds and could be unable to file accurate financial reports on a timely basis. As a result, our reputation, results of operations and stock price could be materially adversely affected.

 

We are subject to various environmental, employee safety and health and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures.

 

We are subject to various foreign, federal, state and local environmental laws and regulations concerning air emissions, wastewater discharges, underground storage tanks and solid and hazardous waste disposal at or from our facilities. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. We are also subject to customs and export laws and regulations for international shipment of our products. Environmental, employee safety and health and customs and export laws and regulations are comprehensive, complex and frequently changing. Some of these laws and regulations are subject to varying and conflicting interpretations. We may be subject from time to time to administrative and/or judicial proceedings or investigations brought by private parties or governmental agencies with respect to environmental matters, employee safety and health issues or customs and export issues. Proceedings and investigations with respect to environmental matters, any employee safety and health issues or customs and export issues could result in substantial costs to us, divert our management’s attention and result in significant liabilities, fines or the suspension or interruption of our service center activities. Some of our current properties are located in industrial areas with histories of heavy industrial use. The location of these properties may require us to incur environmental expenditures and to establish accruals for environmental liabilities that arise from causes other than our operations. In addition, we are currently remediating contamination in connection with a certain property related to activities at former manufacturing operations of a subsidiary we acquired. Future events, such as changes in existing laws and regulations or their enforcement, new laws and regulations or the discovery of conditions not currently known to us, could result in material environmental or export compliance or remedial liabilities and costs, constrain our operations or make such operations more costly.

 

19


 

We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations.

 

Eleven percent of our 2017 sales were to international customers, subjecting us to the risks of doing business on a global level. These risks include fluctuations in currency exchange rates, economic instability and disruptions, restrictions on the transfer of funds and the imposition of duties and tariffs. Additional risks from our multinational business include transportation delays and interruptions, war, terrorist activities, epidemics, pandemics, political instability, import and export controls, local regulation, changes in governmental policies, labor unrest and current and changing regulatory environments. In addition, government policies on international trade and investment such as import quotas, tariffs, and capital controls, whether adopted by individual governments or addressed by regional trade blocs, can affect the demand for our customers’ products and services. The implementation of more restrictive trade policies, such as higher tariffs or new barriers to entry, in countries in which our customers sell large quantities of products and services could negatively impact our business, results of operations and financial condition.

 

Our operating results could be negatively affected by the global laws, rules and regulations, as well as political environments in the jurisdictions in which we operate. There could be reduced demand for our products, decreases in the prices at which we can sell our products and disruptions of production or other operations. Additionally, there may be substantial capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could negatively impact our operating results.

 

Our international operations continue to expand, exposing us to additional risks.

 

Our international presence has grown, so the risk of incurring liabilities or fines resulting from non‑compliance with various U.S. or international laws and regulations has increased. For example, we are subject to the FCPA, and similar worldwide anti‑bribery laws in non‑U.S. jurisdictions such as the United Kingdom’s Bribery Act 2010, which generally prohibit companies and their intermediaries from corruptly paying, offering to pay, or authorizing the payment of money, a gift, or anything of value, to a foreign official or foreign political party, for purposes of obtaining or retaining business. A company can be held liable under these anti‑bribery laws not just for its own direct actions, but also for the actions of its foreign subsidiaries or other third parties, such as agents or distributors. In addition, we could be held liable for actions taken by employees or third parties on behalf of a company that we acquire. If we fail to comply with the requirements under these laws and other laws we are subject to due to our international operations, we may face possible civil and/or criminal penalties, which could have a material adverse effect on our business or financial results.

 

We may be subject to risks relating to changes in our tax rates or exposure to additional income tax liabilities.

 

We are subject to income taxes in the United States and various non‑U.S. jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective income tax rate could be affected by changes in the mix of earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax rates or tax laws or regulations. In particular, although the passage of the Tax Cut and Jobs Act of 2017 reduced the U.S. tax rate to 21%, our future earnings could be negatively impacted by changes in tax legislation including changing tax rates and tax base such as limiting, phasing-out or eliminating deductions or tax credits, changing rules for earnings repatriations and changing other tax laws in the U.S. or other countries. In addition, it is uncertain if, and to what extent, various states will conform to the new tax law and foreign countries will react by adopting tax legislation or taking other actions that could adversely affect our business.

 

In addition, the amount of income taxes we pay is subject to audits by U.S. federal, state and local tax authorities and by non‑U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to our income tax liabilities, which could have an adverse effect on our results of operations and liquidity.

 

20


 

We rely on information management systems and any damage, interruption or compromise of our information management systems or data could disrupt and harm our business.

 

We rely upon information technology systems and networks, some of which are managed by third parties, to process, transmit, and store electronic information in connection with the operation of our business. Additionally, we collect and store data that is sensitive to our company. Operating these information technology systems and networks and processing and maintaining this data, in a secure manner, are critical to our business operations and strategy. Our information management systems and the data contained therein may be vulnerable to damage, including interruption due to power loss, system and network failures, operator negligence and similar causes.

 

In addition, our systems and data may be subject to security breaches, viruses, malware, and other cybersecurity attacks. Cybersecurity attacks are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced threats. These threats pose a risk to the security of our information technology systems and networks and the confidentiality, availability and integrity of our data. We have experienced cybersecurity events on the Company’s and certain of our affiliates’ networks and/or systems. To date, none of these events has had a material impact on our or our affiliates’ operations or financial results. We may experience similar or more sophisticated events in the future. We believe that we have adopted appropriate measures to mitigate potential risks to our technology and our operations from these information technology‑related and other potential disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. Any significant compromise of our information management systems or data could impede or interrupt our business operations and may result in negative consequences including loss of revenue, fines, penalties, litigation, reputational damage, inability to accurately and/or timely complete required filings with government entities including the SEC and the Internal Revenue Service, unavailability or disclosure of confidential information (including personal information) and negative impact on our stock price.

 

An inability to successfully develop and manage the implementation of our new enterprise resource planning (“ERP”) system could adversely affect our operations and operating results.

 

We are in the process of customizing a third party ERP system to be deployed at certain of our operating locations over the next few years, on a subsidiary by subsidiary basis. The Company has committed significant resources to this new ERP system, which, when implemented, will replace certain of our legacy systems. The Company plans to implement this system, when available, on a subsidiary by subsidiary, or location by location, basis to minimize risks of disruption to the business. A project of this size may result in cost overruns, project delays, or business interruptions. Any business disruption could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business at those locations where deployed.

 

Our financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters.

 

We are subject to a variety of litigation and legal compliance risks. These risks include, among other things, possible liability relating to product liability, personal injuries, intellectual property rights, contract‑related claims, government contracts, taxes, environmental matters and compliance with U.S. and foreign laws, including competition laws and laws governing improper business practices. We or one of our subsidiaries could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments, or other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time and so may their related interpretations. Changes in laws or regulations could result in higher

21


 

expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights.

 

The volatility of the market could result in a material impairment of goodwill or indefinite‑lived intangible assets.

 

We review the recoverability of goodwill and indefinite‑lived intangible assets annually or whenever significant events or changes in circumstances occur that might impair the recovery of recorded costs. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or indefinite‑lived intangible assets may not be recoverable, include a decline in stock price and market capitalization, declines in the market conditions of our products, viability of end markets (such as the energy market due to lower oil prices - see discussion of impairment charges taken in 2016 and 2015 in Note 17 — “Impairment and Restructuring Charges” of Part II, Item 8 “Financial Statements and Supplementary Data”), loss of customers, reduced future cash flow estimates, and slower growth rates in our industry. An impairment charge, if incurred, could be material.

 

Our business operations and financial performance could be adversely affected by changes in our relationship with our employees or changes to U.S. or foreign employment regulations.

 

We had approximately 14,900 employees worldwide as of December 31, 2017. This means we have a significant exposure to changes in domestic and foreign laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll taxes, which likely would have a direct impact on our operating costs. A significant increase in minimum wage or overtime rates in jurisdictions where we have employees could have a significant impact on our operating costs and may require that we relocate those operations or take other steps to mitigate such increases, all of which may cause us to incur additional costs, expend resources responding to such increases and lower our profitability.

 

We face certain risks associated with potential labor disruptions.

 

Approximately 12% of our employees are covered by collective bargaining agreements and/or are represented by unions or workers’ councils. Approximately 600 employees are covered by 23 different collective bargaining agreements that expire in 2018. While we believe that our relations with our employees are generally good, we cannot provide assurances that we will be completely free of labor disruptions such as work stoppages, work slowdowns, union organizing campaigns, strikes, lockouts or that any existing labor disruption will be favorably resolved. We could incur additional costs and/or experience work stoppages that could adversely affect our business operations through a loss of revenue and strained relationships with customers.

 

Risks Related to our Indebtedness

 

Our indebtedness could impair our financial condition or cause a downgrade of our credit rating and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.

 

We have substantial debt service obligations. As of December 31, 2017, we had aggregate outstanding indebtedness of approximately $1.91 billion. This indebtedness could adversely affect us in the following ways:

 

·

additional financing may not be available to us in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes and, if available, may be considerably more costly than our current debt costs;

 

·

a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations, dividends or other purposes;

 

·

some of the interest on our debt is, and will continue to be, accrued at variable rates, which could result in higher interest expense in the event of increases in interest rates, which is expected to occur in future periods;

 

22


 

·

our leverage may increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; and

 

·

our ability to capitalize on significant business opportunities, including potential acquisitions, and to plan for, or respond to, competition and changes in our business may be limited due to our indebtedness.

 

Our existing debt agreements contain financial and restrictive covenants that limit the total amount of debt that we may incur, and may limit our ability to engage in other activities that we may believe are in our long‑term best interests. Our failure to comply with these covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or prevent us from accessing additional funds under our revolving credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. See discussion regarding our financial covenants in the “Liquidity and Capital Resources” section of Item 7  “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

We may not be able to generate sufficient cash flow to meet our existing debt service obligations.

 

Our ability to generate sufficient cash flow from operations, draw on our revolving credit facility or access the capital markets to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. For example, we may not generate sufficient cash flow from our operations or new acquisitions to repay amounts drawn under our revolving credit facility when it matures in 2021, amortization payments on our term loan, or our debt securities when they mature in 2023 and 2036. If we do not generate sufficient cash flow from operations or have availability to borrow on our revolving credit facility to satisfy our debt obligations, we would expect to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We may not be able to consummate any such transactions at all or on a timely basis or on terms, and for proceeds, that are acceptable to us. These transactions may not be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations or to timely refinance our obligations on acceptable terms could adversely affect our ability to serve our customers or we may not be able to continue our operations as planned.

 

Changes in the Company’s credit ratings could increase cost of funding.

 

Our credit ratings are important to our cost of capital. The major rating agencies routinely evaluate our credit profile and assign debt ratings to Reliance. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. Any downgrade in our credit rating could increase our cost of capital and have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

We are permitted to incur more debt, which may intensify the risks associated with our current leverage, including the risk that we will be unable to service our debt or that our credit rating may be downgraded.

 

We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. If we incur additional debt, the risks associated with our leverage, including the risk that we will be unable to service our debt or that we may be subject to a credit rating downgrade, may increase.

 

Our acquisition strategy and growth capital expenditures may require access to external capital, and limitations on our access to external financing sources could impair our ability to grow.

 

We may have to rely on external financing sources, including commercial borrowings and issuances of debt and equity securities, to fund our acquisitions and growth capital expenditures. Limitations on our access to external financing sources, whether due to tightened capital markets, more expensive capital or otherwise, could impair our ability to execute our growth strategy.

 

23


 

Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short‑term interest rates, we are vulnerable to interest rate increases.

 

A substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain short‑term prevailing interest rates. At December 31, 2017, we had $1.16 billion in total variable interest rate debt outstanding with $908.7 million available for borrowing under our revolving credit facility. Assuming a consistent level of debt, a 100 basis point increase in the interest rate on our floating rate debt would result in approximately $11.6 million of additional interest expense on an annual basis. We currently do not use derivative financial instruments to manage the potential impact of interest rate risk. If interest rates continue to increase, we could experience increased interest expense which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

As of December 31, 2017, we maintained more than 300 metals service center processing and distribution facilities in 40 states in the U.S. and in 13 other countries, and our corporate headquarters. In the opinion of management, all of our service center facilities are in good or excellent condition and are adequate for our existing operations. These facilities currently operate at about 50‑60% of capacity based upon a 24‑hour seven‑day week, with each location averaging approximately two shifts operating at full capacity for a five‑day work week. We have the ability to increase our operating capacity significantly without further investment in facilities or equipment if demand levels increase.

 

Of the more than 300 processing and distribution facilities that we maintained, we leased 94 of those facilities as of December 31, 2017. In addition, we have ground leases and other leased spaces, such as depots, sales offices and storage, for a total of approximately 6.5 million square feet. Total square footage on all company‑owned properties is approximately 26.9 million and represents approximately 80% of the total square footage of our operating facilities. In addition, we lease our corporate headquarters in Los Angeles, California. Our leases of facilities and other spaces expire at various times through 2028 and our ground leases expire at various times through 2041. The aggregate monthly rent amount for these properties is approximately $2.7 million.

 

Item 3.  Legal Proceedings

 

From time to time, we are named as a defendant in legal actions. Generally, these actions arise out of our normal course of business. We are not currently a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse effect on our results of operations or financial condition. We maintain liability insurance against risks arising out of our normal course of business.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

24


 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994. The following table sets forth the high and low sales prices of our common stock for the stated calendar quarters.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

High

    

Low

    

High

    

Low

First Quarter

$

88.58

 

$

76.18

 

$

71.34

 

$

50.08

Second Quarter

$

82.28

 

$

69.31

 

$

78.38

 

$

67.57

Third Quarter

$

76.98

 

$

68.46

 

$

84.25

 

$

67.66

Fourth Quarter

$

87.33

 

$

72.69

 

$

87.58

 

$

65.10

 

As of February 23, 2018, there were 203 record holders of our common stock. Our record holders exclude holders whose shares were held for them in street name through bank, brokers or other nominee accounts. We have paid quarterly cash dividends on our common stock for 58 consecutive years and have never reduced or suspended our dividend. In February 2018, our Board of Directors increased the regular quarterly dividend amount 11.1% to $0.50 per share. Our Board of Directors has increased the quarterly dividend rate on a periodic basis with the most recent being our 25th increase since our IPO in 1994. Further increases in the quarterly dividend rate will be evaluated by the Board based on conditions then existing, including our earnings, cash flows, financial condition and capital requirements, or other factors the Board may deem relevant. We expect to continue to declare and pay dividends in the future, if earnings are available to pay dividends, but we also intend to continue to retain a portion of earnings for reinvestment in our operations and expansion of our businesses. We cannot assure you that any dividends will be paid in the future or that, if paid, the dividends will be at the same amount or frequency as paid in the past. Our payment of dividends in the future will depend on business conditions, our financial condition, earnings, liquidity and capital requirements and other factors.

 

Our credit agreement contains covenants, which, among other things, restricts our ability to pay dividends if we cannot satisfy certain financial tests. See discussion regarding our financial covenants in the “Liquidity and Capital Resources” section of Item 7  “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For 2015 through 2017, we have paid between 21% and 39% of earnings to our stockholders as dividends.

 

The following table contains certain information with respect to our cash dividends declared during the past two fiscal years:

 

 

 

 

 

 

 

 

 

Date of Declaration

    

Record Date

    

Payment Date

    

Dividends

10/24/2017

 

11/17/2017

 

12/8/2017

 

$

0.45 per share

7/25/2017

 

8/18/2017

 

9/8/2017

 

$

0.45 per share

4/25/2017

 

5/26/2017

 

6/16/2017

 

$

0.45 per share

2/14/2017

 

3/10/2017

 

3/24/2017

 

$

0.45 per share

10/19/2016

 

11/18/2016

 

12/16/2016

 

$

0.425 per share

7/20/2016

 

8/12/2016

 

9/9/2016

 

$

0.425 per share

4/19/2016

 

5/27/2016

 

6/17/2016

 

$

0.40 per share

2/16/2016

 

3/11/2016

 

3/31/2016

 

$

0.40 per share

 

25


 

Share repurchase activity during the three months ended December 31, 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of
Shares Purchased

 

Average Price Paid
Per Share ($)

 

Total Number of Shares Purchased as Part of Publicly Announced Plan

 

Maximum Number of Shares That May Yet Be Purchased Under the Plan(1)

October 1 - October 31, 2017

 

 —

 

 —

 

 —

 

8,428,592

November 1 - November 30, 2017

 

336,616

 

74.27

 

336,616

 

8,091,976

December 1 - December 31, 2017

 

 —

 

 —

 

 —

 

8,091,976

Total

 

336,616

 

 

 

336,616

 

 

 


(1)

On October 20, 2015, our Board of Directors amended our share repurchase plan increasing by 7,500,000 shares the total number of shares authorized to be repurchased and extending the program through December 31, 2018. Our share repurchase plan does not obligate us to acquire any specific number of shares. Under the share repurchase plan, shares may be repurchased in the open market or privately negotiated transactions, including plans complying with Rule 10b5-1 under the Exchange Act.

 

Additional information regarding securities authorized for issuance under all stock‑based compensation plans will be included under the caption “EXECUTIVE COMPENSATION — Equity Compensation Plan Information” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 16, 2018.

 

Stock Performance Graph

 

The following graph compares the performance of our common stock with that of the S&P 500, the Russell 2000 and an industry peer group consisting of publicly-traded metals service center companies (the “industry peer group”) for the five‑year period from December 31, 2012 through December 31, 2017. The comparison of total return assumes that a fixed investment of $100 was invested on December 31, 2012 in all common stock and assumes the reinvestment of dividends. Since there is no nationally‑recognized industry index consisting of metals service center companies to be used as a peer group index, Reliance constructed the industry peer group. As of December 31, 2017, the industry peer group consisted of Olympic Steel Inc., which has securities listed for trading on NASDAQ; Ryerson Holding Corporation and Worthington Industries, Inc., each of which has securities listed for trading on the NYSE; and Russel Metals Inc., which has securities listed for trading on the Toronto Stock Exchange. The returns of each member of the industry peer group are weighted according to that member’s stock market capitalization.

 

26


 

The stock price performance shown on the graph below is not necessarily indicative of future price performance.

 

Comparison of 5 Year Cumulative Total Return Among Reliance Steel & Aluminum Co.,

the S&P 500 Index, the Russell 2000 Index and an Industry Peer Group

 

Picture 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

    

2013

    

2014

    

2015

    

2016

    

2017

Reliance Steel & Aluminum Co.

$

100.00

 

$

124.35

 

$

102.51

 

$

99.51

 

$

139.80

 

$

154.44

S&P 500

 

100.00

 

 

132.39

 

 

150.51

 

 

152.59

 

 

170.84

 

 

208.14

Russell 2000

 

100.00

 

 

138.82

 

 

145.62

 

 

139.19

 

 

168.85

 

 

193.58

Industry Peer Group

 

100.00

 

 

138.36

 

 

102.80

 

 

82.23

 

 

142.43

 

 

143.55

 

 

 

27


 

Item 6.  Selected Financial Data

 

We have derived the following selected summary consolidated financial and operating data for each of the five years ended December 31, 2017 from our audited consolidated financial statements. You should read the information below with Part II, Item 8 “Financial Statements and Supplementary Data” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017

 

2016

 

2015

 

2014

 

2013

 

(in millions, except share and per share data)

Income Statement Data: 

    

 

    

 

 

    

 

 

    

 

 

    

 

 

Net sales

$

9,721.0

 

$

8,613.4

 

$

9,350.5

 

$

10,451.6

 

$

9,223.8

Cost of sales (exclusive of depreciation and amortization expense)

 

6,933.2

 

 

6,023.1

 

 

6,803.6

 

 

7,830.6

 

 

6,826.2

Gross profit (1)  

 

2,787.8

 

 

2,590.3

 

 

2,546.9

 

 

2,621.0

 

 

2,397.6

Warehouse, delivery, selling, general and administrative expense ("S,G&A")

 

1,902.8

 

 

1,798.1

 

 

1,725.3

 

 

1,789.8

 

 

1,636.0

Depreciation and amortization expense

 

218.4

 

 

222.0

 

 

218.5

 

 

213.8

 

 

192.4

Impairment of long-lived assets

 

4.2

 

 

52.4

 

 

53.3

 

 

 —

 

 

14.9

Operating income

 

662.4

 

 

517.8

 

 

549.8

 

 

617.4

 

 

554.3

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

73.9

 

 

84.6

 

 

84.3

 

 

81.9

 

 

77.5

Other expense (income), net

 

4.7

 

 

4.0

 

 

6.8

 

 

(10.8)

 

 

(1.5)

Income before income taxes

 

583.8

 

 

429.2

 

 

458.7

 

 

546.3

 

 

478.3

Income tax (benefit) provision (3) 

 

(37.2)

 

 

120.1

 

 

142.5

 

 

170.0

 

 

153.6

Net income 

 

621.0

 

 

309.1

 

 

316.2

 

 

376.3

 

 

324.7

Less: Net income attributable to noncontrolling interests

 

7.6

 

 

4.8

 

 

4.7

 

 

4.8

 

 

3.1

Net income attributable to Reliance

$

613.4

 

$

304.3

 

$

311.5

 

$

371.5

 

$

321.6

Earnings per share attributable to Reliance stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

$

8.34

 

$

4.16

 

$

4.16

 

$

4.73

 

$

4.14

Basic

$

8.42

 

$

4.21

 

$

4.20

 

$

4.78

 

$

4.19

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

73,539,424

 

 

73,120,918

 

 

74,902,064

 

 

78,615,939

 

 

77,646,192

Basic

 

72,851,021

 

 

72,362,513

 

 

74,096,349

 

 

77,682,943

 

 

76,844,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow provided by operations

$

399.0

 

$

626.5

 

$

1,025.0

 

$

356.0

 

$

633.3

Capital expenditures

 

161.6

 

 

154.9

 

 

172.2

 

 

190.4

 

 

168.0

Cash dividends per share

 

1.80

 

 

1.65

 

 

1.60

 

 

1.40

 

 

1.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (December 31):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

$

2,347.6

 

$

2,032.5

 

$

1,564.5

 

$

2,458.3

 

$

2,165.5

Total assets

 

7,751.0

 

 

7,411.3

 

 

7,121.6

 

 

7,822.4

 

 

7,323.6

Short-term debt

 

92.0

 

 

82.5

 

 

500.8

 

 

93.9

 

 

36.5

Long-term debt (2) 

 

1,809.6

 

 

1,847.2

 

 

1,428.9

 

 

2,209.6

 

 

2,055.1

Reliance stockholders’ equity

 

4,667.1

 

 

4,148.8

 

 

3,914.1

 

 

4,099.0

 

 

3,874.6


(1)

Gross profit, calculated as net sales less cost of sales, is a non‑GAAP financial measure as it excludes depreciation and amortization expense associated with the corresponding sales. The majority of our orders are basic distribution with no processing services performed. For the remainder of our sales orders, we perform “first‑stage” processing, which is generally not labor intensive as we are simply cutting the metal to size. Because of this, the amount of related labor and overhead, including depreciation and amortization, is not significant and is excluded from our cost of sales. Therefore, our cost of sales is substantially comprised of the cost of the material we sell. We use gross profit as shown above as a measure of operating performance. Gross profit is an important operating and financial measure, as fluctuations in our gross profit can have a significant impact on our earnings. Gross profit, as presented, is not necessarily comparable with similarly titled measures for other companies.

 

(2)

Long‑term debt includes the long‑term portion of capital lease obligations.

 

(3)

Income tax (benefit) provision includes a provisional $207.3 million net tax benefit in 2017 relating to the Tax Cuts and Jobs Act of 2017. See Note 9 — “Income Taxes” of Part II, Item 8 “Financial Statements and Supplementary Data” for further information on the impact of the tax legislation.

28


 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary statements and significant risks to the Company’s business under Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

Overview

 

We had excellent execution throughout 2017 resulting in record gross profit. Our sales increased $1.11 billion, or 12.9%, from $8.61 billion in 2016 to $9.72 billion in 2017, the second highest annual sales in our history. Both pricing and demand levels improved from 2016. Pricing levels were higher in 2017 compared to the same period in 2016 for substantially all of the products we sell, which had a favorable impact on our revenues and earnings. We achieved several successes in 2017:

 

·

Gross profit was $2.79 billion in 2017, the highest in our history;

·

Our gross profit margin in each quarter of 2017 was within or above our target range of 27% to 29%;

·

Pre-tax income increased by $154.6 million, or 36.0%, from $429.2 million in 2016 to $583.8 million in 2017; and

·

Our earnings per diluted share were $8.34 per share. Excluding the impact of tax reform, our earnings per share were $5.52 per share, the second highest in our history, trailing only 2008.

 

Our same-store tons sold increased 3.6% in 2017 compared to 2016, due to improved demand levels in most end markets we serve, including the energy end market, which had experienced significant declines in 2016 and 2015.

 

Our same-store average selling price per ton sold increased 9.1% in 2017 compared to 2016. Our same-store average selling price per ton sold has increased sequentially in each of the past seven quarters, mainly for certain carbon and stainless steel products. Metal prices fluctuated throughout 2017 but generally trended higher, especially in the second half of 2017, which we believe was primarily due to improved demand and increased raw material costs.

 

Our same-store S,G&A expense as a percent of sales of 19.5% in 2017 decreased from 20.8% in 2016 mainly due to higher metals pricing that increased our sales levels. In addition, we exercised effective expense control. 

 

We generated cash flow from operations of $399.0 million in 2017, down from $626.5 million in 2016, primarily due to increased working capital requirements from higher metal prices and an improved demand environment in 2017. As of December 31, 2017, our net debt-to-total capital ratio was 27.2%, down from 30.3% as of December 31, 2016. We believe we have sufficient liquidity as of December 31, 2017, with $908.7 million available for borrowing on our revolving credit facility.

 

We used cash generated from operations to further grow the Company in 2017 by completing one acquisition and investing $161.6 million in capital expenditures, while also returning value to our stockholders with $132.0 million of cash dividends and $25.0 million of share repurchases. In addition, during the first quarter of 2018 we increased our quarterly dividend by 11.1%.

 

The recently enacted tax reform legislation will have a favorable impact on our profitability and cash flows through a reduction in our effective income tax rate. In 2017, we recognized a provisional $207.3 million net tax benefit relating to the remeasurement of deferred tax assets and liabilities at the lowered income tax rate, which was partially offset by tax liabilities relating to the deemed repatriation of accumulated foreign profits. Earnings per diluted share, excluding the impact of tax reform, is not a performance measure under U.S. GAAP. We believe it is appropriate to disclose this performance measure as it helps investors analyze business performance and trends. Earnings per diluted share, excluding the impact of tax reform, should be considered neither in isolation nor as a substitute for reported earnings per diluted share prepared in accordance with U.S. GAAP.

 

 

29


 

We believe that our exposure to diverse end markets, broad product base and wide geographic footprint will continue to mitigate earnings volatility compared to many of our competitors.

 

We will continue to focus on working capital management and maximizing profitability of our existing businesses, as well as executing our proven growth strategies and stockholder return activities.

 

Effect of Demand and Pricing Changes on our Operating Results

 

Customer demand can have a significant impact on our results of operations. When volume increases our revenue dollars generally increase, which contributes to increased gross profit dollars. Variable costs also increase with volume, primarily our warehouse, delivery, selling, general and administrative expenses. Conversely, when volume declines, we typically produce fewer revenue dollars, which can reduce our gross profit dollars. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.

 

Pricing for our products can have a much more significant impact on our results of operations than customer demand levels. As pricing increases, so do our revenue dollars. Our pricing usually increases when the cost of our materials increase. We are typically able to pass higher prices on to our customers. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and pre‑tax income dollars for the same operational efforts. Conversely, if pricing declines, we will typically generate lower levels of gross profit and pre‑tax income dollars. Because changes in pricing do not require us to adjust our expense structure other than for profit‑based compensation, the impact on our results of operations from changes in pricing is typically much greater than the effect of volume changes.

 

In addition, when volume or pricing increases, our working capital (primarily accounts receivable and inventories) requirements typically increase, resulting in lower levels of cash flow from operations, which may also require us to increase our outstanding debt and incur higher interest expense. Conversely, when customer demand falls, our operations typically generate stronger cash flow as our working capital needs decrease.

 

Acquisitions

 

2017 Acquisition

 

On October 2, 2017, through our wholly owned subsidiary Diamond Manufacturing Company, we acquired Ferguson Perforating Company (“Ferguson”). Ferguson, headquartered in Providence, Rhode Island, specializes in manufacturing highly engineered and complex perforated metal parts that have application in diverse end markets including industrial machinery, automotive, aerospace, sugar products and consumer electronics manufacturers. Ferguson’s net sales during the period from October 2, 2017 to December 31, 2017 were $7.8 million.

 

2016 Acquisitions

 

On August 1, 2016, through our wholly owned subsidiary American Metals Corporation, we acquired Alaska Steel Company (“Alaska Steel”), a full-line metal distributor headquartered in Anchorage, Alaska. Our acquisition of Alaska Steel was our first entry into the Alaska market. Alaska Steel provides steel, aluminum, stainless and specialty metals and related processing services to a variety of customers in diverse industries including infrastructure and energy throughout Alaska. Alaska Steel’s net sales in 2017 were $22.0 million.

 

On April 1, 2016, we acquired Best Manufacturing, Inc. (“Best Manufacturing”), a custom sheet metal fabricator of steel and aluminum products on both a direct and toll basis. Best Manufacturing, headquartered in Jonesboro, Arkansas, provides various precision fabrication services including laser cutting, shearing, computer numerated control (“CNC”) punching, CNC forming and rolling, as well as welding, assembly, painting, inventory management and engineering expertise. Best Manufacturing’s net sales in 2017 were $21.6 million.

 

On January 1, 2016, we acquired Tubular Steel, Inc. (“Tubular Steel”), a distributor and processor of carbon, alloy and stainless steel pipe, tubing and bar products. Tubular Steel, headquartered in St. Louis, Missouri, has six locations and a fabrication business that supports its diverse customer base. Tubular Steel’s net sales in 2017 were $135.5 million.

30


 

 

Internal Growth Activities

 

We continued to maintain our focus on internal growth by opening new facilities, building or expanding existing facilities and adding processing equipment with total capital expenditures of $161.6 million in 2017, with the majority spent on growth activities. We also continued to add and upgrade processing equipment that enables us to provide higher quality and additional services to our existing and potential customers, resulting in increased market share and higher gross profit margins. We believe that our ability to finance our investments in processing equipment and facilities provides a competitive advantage for us, as we can provide our customers with a higher quality product and expand our services to them, which many of our competitors do not have the ability to provide.

 

Results of Operations

 

The following table sets forth certain income statement data for each of the last three years (dollars are shown in millions and certain percentages may not calculate due to rounding):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

$

 

Net Sales

 

 

$

 

Net Sales

 

 

$

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

9,721.0

 

100.0

%

 

$

8,613.4

 

100.0

%

 

$

9,350.5

 

100.0

%

Cost of sales (exclusive of depreciation and amortization expense shown below) (1)

 

6,933.2

 

71.3

 

 

 

6,023.1

 

69.9

 

 

 

6,803.6

 

72.8

 

Gross profit (2) 

 

2,787.8

 

28.7

 

 

 

2,590.3

 

30.1

 

 

 

2,546.9

 

27.2

 

Warehouse, delivery, selling, general and administrative expense ("S,G&A") (3)

 

1,902.8

 

19.6

 

 

 

1,798.1

 

20.9

 

 

 

1,725.3

 

18.5

 

Depreciation expense

 

167.8

 

1.7