10-Q

Table of Contents

                                                                                                   

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 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

(Address of principal executive offices, including zip code)

(213) 687-7700

(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an 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    (Do not check if a smaller reporting company)

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 Exchange Act).

Yes  ☐  No 

As of July 31, 2017, 72,903,830 shares of the registrant’s common stock, $0.001 par value, were outstanding.

 

 


 

Table of Contents

RELIANCE STEEL & ALUMINUM CO.

TABLE OF CONTENTS

 

 

 

 

 

PART I -- FINANCIAL INFORMATION 

1

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Unaudited Consolidated Balance Sheets

1

 

 

 

 

 

 

Unaudited Consolidated Statements of Income

2

 

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income

3

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows

4

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

 

 

Item 2.

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

13

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

 

 

Item 4.

Controls and Procedures

22

 

 

PART II -- OTHER INFORMATION 

23

 

 

 

 

 

Item 1.

Legal Proceedings 

23

 

 

 

 

 

Item 1A.

Risk Factors

23

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

23

 

 

 

 

 

Item 4.

Mine Safety Disclosures

23

 

 

 

 

 

Item 5.

Other Information

23

 

 

 

 

 

Item 6.

Exhibits

23

 

 

SIGNATURES 

24

 

 

EXHIBIT INDEX 

25

 

 

 

 


 

Table of Contents

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

 

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2017

    

2016*

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

146.5

 

$

122.8

Accounts receivable, less allowance for doubtful accounts of $17.5 at June 30, 2017 and $15.3 at December 31, 2016

 

1,177.5

 

 

960.2

Inventories

 

1,751.3

 

 

1,532.6

Prepaid expenses and other current assets

 

69.1

 

 

72.9

Total current assets

 

3,144.4

 

 

2,688.5

Property, plant and equipment:

 

 

 

 

 

Land

 

230.2

 

 

228.2

Buildings

 

1,076.2

 

 

1,059.2

Machinery and equipment

 

1,689.4

 

 

1,647.3

Accumulated depreciation

 

(1,347.0)

 

 

(1,272.5)

Property, plant and equipment, net

 

1,648.8

 

 

1,662.2

 

 

 

 

 

 

Goodwill

 

1,831.2

 

 

1,827.4

Intangible assets, net

 

1,126.7

 

 

1,151.3

Cash surrender value of life insurance policies, net

 

41.0

 

 

46.9

Other assets

 

39.1

 

 

35.0

Total assets  

$

7,831.2

 

$

7,411.3

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

421.2

 

$

302.2

Accrued expenses

 

88.8

 

 

83.7

Accrued compensation and retirement costs

 

113.0

 

 

140.8

Accrued insurance costs

 

43.2

 

 

40.6

Current maturities of long-term debt and short-term borrowings

 

78.9

 

 

82.5

Income taxes payable

 

2.7

 

 

6.2

Total current liabilities

 

747.8

 

 

656.0

Long-term debt

 

1,990.1

 

 

1,846.7

Long-term retirement costs

 

90.8

 

 

89.6

Other long-term liabilities

 

13.4

 

 

13.0

Deferred income taxes

 

626.8

 

 

626.9

Commitments and contingencies

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, $0.001 par value:

 

 

 

 

 

Authorized shares — 5,000,000

 

 

 

 

 

None issued or outstanding

 

 —

 

 

 —

Common stock and additional paid-in capital, $0.001 par value:

 

 

 

 

 

Authorized shares — 200,000,000

 

 

 

 

 

Issued and outstanding shares – 72,901,625 at June 30, 2017 and 72,682,793 at December 31, 2016

 

607.3

 

 

590.3

Retained earnings

 

3,812.2

 

 

3,663.2

Accumulated other comprehensive loss

 

(88.4)

 

 

(104.7)

Total Reliance stockholders’ equity

 

4,331.1

 

 

4,148.8

   Noncontrolling interests 

 

31.2

 

 

30.3

Total equity 

 

4,362.3

 

 

4,179.1

Total liabilities and equity

$

7,831.2

 

$

7,411.3


* Amounts were derived from audited financial statements.

 

See accompanying notes to unaudited consolidated financial statements.

1


 

Table of Contents

RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2017

    

2016

    

2017

    

2016

Net sales

$

2,475.2

 

$

2,203.9

 

$

4,894.5

 

$

4,366.6

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

and amortization shown below)

 

1,773.1

 

 

1,518.8

 

 

3,470.8

 

 

3,044.8

Warehouse, delivery, selling, general and

 

 

 

 

 

 

 

 

 

 

 

administrative

 

475.9

 

 

455.2

 

 

952.1

 

 

904.7

Depreciation and amortization

 

55.0

 

 

55.5

 

 

110.2

 

 

111.6

 

 

2,304.0

 

 

2,029.5

 

 

4,533.1

 

 

4,061.1

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

171.2

 

 

174.4

 

 

361.4

 

 

305.5

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

18.5

 

 

21.7

 

 

35.8

 

 

43.4

Other expense, net

 

0.3

 

 

1.1

 

 

4.7

 

 

1.3

Income before income taxes

 

152.4

 

 

151.6

 

 

320.9

 

 

260.8

Income tax provision

 

47.6

 

 

49.5

 

 

102.7

 

 

65.2

Net income

 

104.8

 

 

102.1

 

 

218.2

 

 

195.6

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

interests

 

1.8

 

 

1.2

 

 

3.5

 

 

2.5

Net income attributable to Reliance

$

103.0

 

$

100.9

 

$

214.7

 

$

193.1

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Reliance stockholders:

 

 

 

 

 

 

 

 

 

 

 

Diluted

$

1.40

 

$

1.38

 

$

2.92

 

$

2.65

Basic

$

1.41

 

$

1.39

 

$

2.95

 

$

2.68

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

$

0.45

 

$

0.40

 

$

0.90

 

$

0.80

 

See accompanying notes to unaudited consolidated financial statements.

 

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2017

    

2016

   

2017

   

2016

Net income 

$

104.8

 

$

102.1

 

$

218.2

 

$

195.6

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)    

 

6.4

 

 

(4.8)

 

 

14.0

 

 

10.9

Pension and postretirement benefit adjustments, net of tax

 

 —

 

 

 —

 

 

2.3

 

 

 —

Total other comprehensive income (loss)

 

6.4

 

 

(4.8)

 

 

16.3

 

 

10.9

Comprehensive income

 

111.2

 

 

97.3

 

 

234.5

 

 

206.5

Less: Comprehensive income attributable to noncontrolling interests

 

1.8

 

 

1.2

 

 

3.5

 

 

2.5

Comprehensive income attributable to Reliance

$

109.4

 

$

96.1

 

$

231.0

 

$

204.0

 

See accompanying notes to unaudited consolidated financial statements.

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RELIANCE STEEL & ALUMINUM CO.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

 

2017

    

2016

Operating activities:

 

 

 

 

 

Net income 

$

218.2

 

$

195.6

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

110.2

 

 

111.6

Deferred income tax (benefit) provision

 

(2.1)

 

 

1.6

Gain on sales of property, plant and equipment

 

(3.9)

 

 

(0.4)

Stock-based compensation expense

 

14.9

 

 

11.4

Other

 

5.6

 

 

2.5

Changes in operating assets and liabilities (excluding effect of businesses acquired):

 

 

 

 

 

Accounts receivable

 

(215.4)

 

 

(106.2)

Inventories 

 

(216.5)

 

 

(126.6)

Prepaid expenses and other assets 

 

1.4

 

 

20.7

Accounts payable and other liabilities 

 

102.8

 

 

95.0

Net cash provided by operating activities

 

15.2

 

 

205.2

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property, plant and equipment 

 

(72.8)

 

 

(71.7)

Acquisitions, net of cash acquired

 

(1.3)

 

 

(322.4)

Other

 

7.2

 

 

(1.3)

Net cash used in investing activities 

 

(66.9)

 

 

(395.4)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net short-term debt borrowings (repayments)

 

3.3

 

 

(13.5)

Proceeds from long-term debt borrowings 

 

541.0

 

 

613.0

Principal payments on long-term debt

 

(406.7)

 

 

(365.1)

Dividends and dividend equivalents paid 

 

(66.5)

 

 

(58.0)

Exercise of stock options 

 

2.8

 

 

30.1

Other

 

(3.3)

 

 

(3.6)

Net cash provided by financing activities

 

70.6

 

 

202.9

Effect of exchange rate changes on cash 

 

4.8

 

 

(0.5)

Increase in cash and cash equivalents

 

23.7

 

 

12.2

Cash and cash equivalents at beginning of year 

 

122.8

 

 

104.3

Cash and cash equivalents at end of period

$

146.5

 

$

116.5

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid during the period

$

36.1

 

$

41.3

Income taxes paid during the period, net

$

107.1

 

$

58.0

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

RELIANCE STEEL & ALUMINUM CO.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

1.  Basis of Presentation

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements, have been included. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results for the full year ending December 31, 2017. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2016, included in Reliance Steel & Aluminum Co.’s (“Reliance”, the “Company”, “we”, “our” or “us”) Annual Report on Form 10-K.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

 

Our consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. Our investments in unconsolidated subsidiaries are recorded under the equity method of accounting.

 

2.  Impact of Recently Issued Accounting Guidance

 

Impact of Recently Issued Accounting Standards—Adopted

 

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost—In March 2017, the Financial Accounting Standards Board (“FASB”) issued accounting changes to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and to narrow the amounts eligible for capitalization in assets. The amendments require the service cost component of net periodic benefit cost be reported in the same line as other compensation costs and the other components of net periodic benefit cost be presented in the income statement outside of operating income. We adopted these changes in the three months ended March 31, 2017 on a retrospective basis. As a result of the adoption, we retrospectively adjusted the presentation of our income statement for the three-month and six-month periods ended June 30, 2016, decreasing Warehouse, delivery, selling, general and administrative expense by $1.3 million and $2.6 million, respectively, and increasing Other expense, net by $1.3 million and $2.6 million, respectively. The adjustment to the income statement presentation for the 2016 periods was estimated using the components of net periodic benefit cost other than service cost included in Note 11 “Employee Benefits” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. We include the components of net periodic benefit cost other than service cost in Other Expense, net in all periods presented. The amendment requiring only the service cost component of net periodic benefit cost to be eligible for capitalization in assets did not impact our asset capitalization policies. The adoption of these changes did not have a material impact on our consolidated financial statements.

 

Clarifying the Definition of a Business—In January 2017, the FASB issued accounting changes to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The accounting changes provide a framework to determine when a set of assets and activities is not a business. These accounting changes, which will be applied to our future acquisitions, were adopted during the three months ended March 31, 2017. The adoption of these accounting changes will not have a material impact on our consolidated financial statements.

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Impact of Recently Issued Accounting Standards—Not Yet Adopted

 

Classification of Certain Cash Receipts and Cash Payments—In August 2016, the FASB issued accounting changes that clarifies the presentation and classification of certain cash receipts and payments in the statement of cash flows with the objective of reducing the existing diversity in practice with respect to eight types of cash flows. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2017, or January 1, 2018 for the Company. Early adoption is permitted. The adoption of this standard will not have a material impact on our consolidated financial statements.

 

Leases—In February 2016, the FASB issued accounting changes which will require lessees to recognize most long-term leases on-balance sheet through the recognition of a right-of-use asset and a lease liability. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2018, or January 1, 2019 for the Company. Early adoption is permitted. We have implemented a lease management system and are developing processes necessary to implement these accounting changes. We expect the adoption of these accounting changes will materially increase our assets and liabilities, but will not have a material impact on our net income or equity. We anticipate adopting this new standard on January 1, 2019 with modified retrospective application, using the available practical expedients. Full retrospective application is prohibited.

 

Revenue from Contracts with CustomersIn May 2014, the FASB issued accounting changes, which replace most of the detailed guidance on revenue recognition that currently exists under U.S. GAAP. Under the new guidance an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will adopt the new guidance on January 1, 2018 using the modified retrospective method, which requires that we recognize the cumulative effect of initially applying the accounting changes as an adjustment to opening retained earnings on the adoption date. We primarily sell our inventories in the “spot market” pursuant to fixed price purchase orders and do not enter into transactions with multiple performance obligations. As such, we do not expect this standard to have a material impact on our consolidated financial statements. During 2017, we will continue to evaluate this standard and update the disclosures on its impact.

 

3.  Acquisitions

 

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 for the six months ended June 30, 2017 were $10.7 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 for the six months ended June 30, 2017 were $10.9 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 for the six months ended June 30, 2017 were $68.7 million.

 

We funded our 2016 acquisitions with borrowings on our revolving credit facility and cash on hand.

 

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The allocation of the total purchase price of our 2016 acquisitions to the fair values of the assets acquired and liabilities assumed was as follows:

 

 

 

 

 

(in millions)

Cash 

$

1.5

Accounts receivable 

 

14.1

Inventories 

 

66.6

Property, plant and equipment 

 

62.2

Goodwill 

 

104.7

Intangible assets subject to amortization 

 

77.1

Intangible assets not subject to amortization 

 

38.2

Other current and long-term assets 

 

0.5

Total assets acquired 

 

364.9

Current and long-term debt

 

6.1

Other current and long-term liabilities 

 

7.3

Total liabilities assumed 

 

13.4

Net assets acquired

$

351.5

 

The acquisitions discussed in this note have been accounted for under the acquisition method of accounting and, accordingly, the respective purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of each acquisition. The accompanying consolidated statements of income include the revenues and expenses of each acquisition since its respective acquisition date. The consolidated balance sheets reflect the allocation of each acquisition’s purchase price as of June 30, 2017 and December 31, 2016. The measurement periods for purchase price allocations do not exceed 12 months from the acquisition date.

 

4.  Goodwill

 

The change in the carrying amount of goodwill is as follows:

 

 

 

 

(in millions)

Balance at January 1, 2017

$

1,827.4

Acquisition

 

1.3

Effect of foreign currency translation

 

2.5

Balance at June 30, 2017

$

1,831.2

 

We had no accumulated impairment losses related to goodwill at June 30, 2017. 

 

5.  Intangible Assets, net

 

Intangible assets, net consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

Weighted Average

 

Gross

 

 

 

 

Gross

 

 

 

 

Amortizable

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

Life in Years

    

Amount

  

Amortization

  

Amount

  

Amortization

 

 

 

(in millions)

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Covenants not to compete

4.8

 

$

1.1

 

$

(0.7)

 

$

1.1

 

$

(0.6)

Customer lists/relationships

14.6

 

 

739.0

 

 

(366.5)

 

 

736.7

 

 

(338.9)

Software

10.0

 

 

8.1

 

 

(8.1)

 

 

8.1

 

 

(8.1)

Other

5.3

 

 

6.5

 

 

(5.8)

 

 

6.3

 

 

(5.5)

 

 

 

 

754.7

 

 

(381.1)

 

 

752.2

 

 

(353.1)

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

 

753.1

 

 

 

 

752.2

 

 

 

 

 

$

1,507.8

 

$

(381.1)

 

$

1,504.4

 

$

(353.1)

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We recognized amortization expense for intangible assets of $26.7 million and $27.1 million for the six months ended June 30, 2017 and 2016, respectively. Foreign currency translation gains related to intangible assets, net, were $2.1 million during the six months ended June 30, 2017.

 

The following is a summary of estimated aggregate amortization expense for the remaining six months of 2017 and each of the succeeding five years:

 

 

 

 

 

 

(in millions)

2017 (remaining six months)

$

23.7

2018

 

46.2

2019

 

46.0

2020

 

46.0

2021

 

42.1

2022

 

33.9

 

 

6.  Debt

 

Debt consisted of the following:

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2017

    

2016

 

(in millions)

Unsecured revolving credit facility due September 30, 2021

$

697.0

 

$

540.0

Unsecured term loan due from September 29, 2017 to September 30, 2021

 

577.5

 

 

600.0

Senior unsecured notes due April 15, 2023

 

500.0

 

 

500.0

Senior unsecured notes due November 15, 2036

 

250.0

 

 

250.0

Other notes and revolving credit facilities

 

59.0

 

 

55.0

Total

 

2,083.5

 

 

1,945.0

Less: unamortized discount and debt issuance costs

 

(14.5)

 

 

(15.8)

Less: amounts due within one year and short-term borrowings

 

(78.9)

 

 

(82.5)

Total long-term debt

$

1,990.1

 

$

1,846.7

 

Unsecured Credit Facility

 

On September 30, 2016, we entered into a $2.1 billion unsecured five-year credit agreement (“Credit Agreement”) comprised of a $1.5 billion unsecured revolving credit facility and a $600.0 million unsecured term loan, with an option to increase the revolving facility up to an additional $500.0 million at our request, subject to approval of the lenders and certain other customary conditions. The term loan due September 30, 2021 amortizes in quarterly installments, with an annual amortization of 5% through September 2018 and 10% thereafter until June 2021, with the balance to be paid at maturity. Interest on borrowings from the revolving credit facility and term loan at June 30, 2017 was at variable rates based on LIBOR plus 1.25% or the bank prime rate plus 0.25% and included a commitment fee at an annual rate of 0.15% on the unused portion of the revolving credit facility. The applicable margins over LIBOR and base rate borrowings, along with commitment fees, are subject to adjustment every quarter based on our leverage ratio, as defined in the Credit Agreement. All borrowings under the Credit Agreement may be prepaid without penalty.

 

Weighted average interest rates on borrowings outstanding on the revolving credit facility were 2.48% and 2.16% as of June 30, 2017 and December 31, 2016, respectively. Weighted average interest rates on borrowings outstanding on the term loan were 2.48% and 2.02% as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, we had $697.0 million of outstanding borrowings, $62.5 million of letters of credit issued and $740.5 million available for borrowing on the revolving credit facility.

 

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Senior Unsecured Notes

 

On November 20, 2006, we entered into an indenture (the “2006 Indenture”), for the issuance of $600.0 million of unsecured debt securities. The total debt issued was comprised of two tranches, (a) $350.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, which matured and were repaid on November 15, 2016 and (b) $250.0 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036.

 

On April 12, 2013, we entered into an indenture (the “2013 Indenture” and, together with the 2006 Indenture, the “Indentures”), for the issuance of $500.0 million aggregate principal amount of senior unsecured notes at the rate of 4.50% per annum, maturing on April 15, 2023. 

 

Under the Indentures, the notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations.

 

The senior unsecured notes include provisions that require us to make an offer to repurchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in the event of both a change in control and a downgrade of our credit rating.

 

Other Notes and Revolving Credit Facilities

 

Revolving credit facilities with a combined credit limit of approximately $67.9 million are in place for operations in Asia and Europe with combined outstanding balances of $48.4 million and $44.4 million as of June 30, 2017 and December 31, 2016, respectively.

 

Various industrial revenue bonds had combined outstanding balances of $10.6 million as of June 30, 2017 and December 31, 2016, and have maturities through 2027.

 

Covenants

 

The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two financial covenants. The financial covenants require us to maintain an interest coverage ratio and a maximum leverage ratio. We were in compliance with all financial covenants in our Credit Agreement at June 30, 2017.

 

 

7.  Income Taxes

 

Our effective income tax rates for the three months ended June 30, 2017 and 2016 were 31.2% and 32.7%, respectively. Our effective income tax rates for the six months ended June 30, 2017 and 2016 were 32.0% and 25.0%, respectively. Our 2016 six-month period effective income tax rate was favorably impacted by the resolution of a tax position that was previously uncertain, which lowered our 2016 six-month income tax provision by $17.6 million and our effective income tax rate by 6.7%. Other permanent items that lowered our effective income tax rates from the federal statutory rate were not materially different during both years and relate mainly to company-owned life insurance policies, domestic production activities deductions and foreign income levels that are taxed at rates lower than the U.S. statutory rate of 35%.

 

8.  Equity

 

Common Stock

 

As of June 30, 2017, we had authorization to purchase a total of approximately 8.4 million shares under our existing share repurchase plan, or about 12% of outstanding shares. There were no share repurchases in the six months ended June 30, 2017. Repurchased and subsequently retired shares are restored to the status of authorized but unissued shares.

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Common stock and additional paid-in capital activity included the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2017

 

June 30, 2017

 

 

 

Weighted Average

 

 

 

Weighted Average

 

Shares

    

Amount

    

Exercise Price

 

Shares

    

Amount

    

Exercise Price

 

(in millions, except share and per share amounts)

Stock-based compensation(1)

20,794

    

$

9.4

    

 

 

    

162,302

    

$

14.2

    

 

 

Stock options exercised

1,225

    

 

 —

    

$

55.73

    

56,530

    

 

2.8

    

$

49.95

Total

22,019

    

$

9.4

    

 

 

    

218,832

    

$

17.0

    

 

 


(1)

The six months ended June 30, 2017 amount is comprised of stock-based compensation expense of $14.9 million reduced by $0.7 million of payments we made to tax authorities on our employees’ behalf for shares withheld related to net share settlements.

 

Dividends

 

On July 25, 2017, our Board of Directors declared the 2017 third quarter cash dividend of $0.45 per share. The dividend is payable on September 8, 2017 to stockholders of record as of August 18, 2017.

 

During the second quarters of 2017 and 2016, we declared and paid quarterly dividends of $0.45 per share and $0.40 per share, or $32.8 million and $29.0 million in total, respectively. During the six months ended June 30, 2017 and 2016, we declared and paid quarterly dividends of $0.90 and $0.80 per share, or $65.6 million and $57.1 million in total, respectively. During the six months ended June 30, 2017 and 2016, we paid $0.9 million in dividend equivalents with respect to vested restricted stock units (“RSUs”).

 

Stock-Based Compensation

 

We make annual grants of long-term incentive awards to officers and key employees in the forms of service-based and performance-based RSUs that generally have 3-year vesting periods. The performance-based RSU awards are subject to both service and performance goal criteria. We also make annual grants of restricted stock to the non-employee members of the Board of Directors that include dividend rights and vest immediately upon grant. During the three months ended June 30, 2017, we granted 18,120 shares of restricted stock to the non-employee members of the Board of Directors with a fair value of $71.73 per share. The fair value of the RSUs and restricted stock awards is determined based on the closing stock price of our common stock on the grant date.

 

A summary of the status of our unvested service-based and performance-based RSUs as of June 30, 2017 and changes during the six-month period then ended is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average Grant

Unvested Shares

 

Shares

 

Date Fair Value

Unvested at January 1, 2017

 

985,540

 

$

64.34

Granted(1)

 

446,525

 

 

79.60

Vested

 

(6,029)

 

 

61.86

Cancelled

 

(31,901)

 

 

67.40

Unvested at June 30, 2017

 

1,394,135

 

$

69.17

Shares reserved for future grants (all plans)

 

1,643,169

 

 

 


(1)

446,525 RSUs, including 169,009 performance-based RSUs.

 

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Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss included the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

Accumulated

 

Foreign Currency

 

Postretirement

 

Other

 

Translation

 

Benefit Adjustments,

 

Comprehensive

 

(Loss) Gain

    

Net of Tax

    

(Loss) Income

 

(in millions)

Balance as of January 1, 2017

$

(79.9)

 

$

(24.8)

 

$

(104.7)

Current-period change

 

14.0

 

 

2.3

 

 

16.3

Balance as of June 30, 2017

$

(65.9)

 

$

(22.5)

 

$

(88.4)

 

Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries. Pension and postretirement benefit adjustments are net of taxes of $13.5 million and $14.9 million as of June 30, 2017 and December 31, 2016, respectively.

 

9.  Commitments and Contingencies

 

Environmental Contingencies

 

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, which were sold many years prior to Reliance’s acquisition of EMJ in 2006. Although the potential cleanup costs could be significant, EMJ had maintained insurance policies during the time it owned the manufacturing operations that have covered costs incurred to date, and are expected to continue to cover the majority of the related costs. We do not expect that this obligation will have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

Legal Matters

 

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 general liability insurance against risks arising out of our normal course of business.

 

10.  Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2017

  

2016

 

2017

 

2016

 

(in millions, except share and per share amounts)

Numerator:

 

 

   

 

 

   

 

 

   

 

 

Net income attributable to Reliance 

$

103.0

   

$

100.9

   

$

214.7

   

$

193.1

Denominator:

 

 

   

 

 

   

 

 

   

 

 

Weighted average shares outstanding

 

72,891,406

   

 

72,372,056

   

 

72,866,779

   

 

72,150,938

Dilutive effect of stock-based awards

 

609,295

   

 

740,752

   

 

591,391

   

 

759,640

Weighted average diluted shares outstanding

 

73,500,701

   

 

73,112,808

   

 

73,458,170

   

 

72,910,578

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Reliance stockholders:

 

 

 

 

 

 

 

 

 

 

 

Diluted

$

1.40

 

$

1.38

 

$

2.92

 

$

2.65

Basic

$

1.41

 

$

1.39

 

$

2.95

 

$

2.68

 

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Potentially dilutive securities whose effect would have been antidilutive were not significant for the three-month and six-month periods ended June 30, 2017 and 2016.

 

 

 

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RELIANCE STEEL & ALUMINUM CO.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This report contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements may include, but are not limited to, discussions of our industry, our end markets, our business strategies and our expectations concerning future demand and our results of operations, margins, profitability, impairment charges, 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. All statements contained in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date of such statements.

 

Forward-looking statements involve known and unknown risks and uncertainties and are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements as a result of various important factors, including, but not limited to, those disclosed in this report and in other reports we have filed with the Securities and Exchange Commission (the “SEC”). As a result, these statements speak only as of the date that they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Important risks and uncertainties about our business can be found in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

 

Overview

 

We had strong operational execution in the three-month and six-month periods ended June 30, 2017. Sales for the three-month period ended June 30, 2017 were $2.48 billion, up 12.3% from $2.20 billion in the same period in 2016. During the six months ended June 30, 2017, sales were $4.89 billion, up 12.1% from $4.37 billion in the same period in 2016. Demand was up slightly in the 2017 periods compared to the 2016 periods. Pricing levels were higher in the six months ended June 30, 2017 compared to the same period in 2016, especially for carbon (52% of our sales) and stainless steel (14% of our sales) products, which had a favorable impact on our revenues. We achieved several operational successes in the three-month and six-month periods ended June 30, 2017:

 

·

Gross profit was $702.1 million in the second quarter of 2017, the second highest quarterly result in our history, following our record $721.6 million set in the first quarter of 2017;

 

·

Our gross profit margin was 29.8% in the first quarter of 2017 and 28.4% in the second quarter of 2017, both within or above our recently increased range of 27% to 29%; and

 

·

For the six months ended June 30, 2017, our pre-tax income increased by $60.1 million from $230.8 million to $320.9 million, or 23.0%, compared to the same period in 2016.

 

Our same-store tons sold increased 1.1% and 1.6% in the three-month and six-month periods ended June 30, 2017, respectively, compared to the same periods in 2016, due to slightly improved customer demand levels across many industries, including the energy (oil and gas) market. 

 

Our same-store average selling price per ton sold in the three-month and six-month periods ended June 30, 2017 increased 11.3% and 10.5%, respectively, compared to the same periods in 2016. Our same-store average selling price per ton sold has increased sequentially in each of the past five quarters, mainly for certain carbon and stainless steel products. Metal prices began to increase in the second quarter of 2016 which we believe was primarily due to improved demand and lower imports resulting from the impact of trade case filings by U.S. steel producers. However, imports increased in the second quarter of 2017 causing some downward pressure on pricing, although prices remain at higher levels than in the 2016 first half.

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Our same-store S,G&A expense as a percent of sales of 19.1% and 19.4% in the three-month and six-month periods ended June 30, 2017, respectively, decreased from 20.6% in each of the same 2016 periods mainly due to higher metals pricing levels during the 2017 periods that increased our sales levels.

 

We generated cash flow from operations of $15.2 million in the six months ended June 30, 2017, down from $205.2 million in the same period of 2016 primarily due to increased working capital requirements from higher metal prices and an improved demand environment. As of June 30, 2017, our net debt-to-total capital ratio was 30.7%, up slightly from 30.3% as of December 31, 2016. We have significant liquidity as of June 30, 2017, with approximately $740.5 million available for borrowing on our revolving credit facility.

 

We believe that our exposure to diverse end markets, broad product base, and wide geographic footprint will continue to lessen 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.

 

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 for the six months ended June 30, 2017 were $10.7 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 for the six months ended June 30, 2017 were $10.9 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 for the six months ended June 30, 2017 were $68.7 million.

 

We funded our 2016 acquisitions with borrowings on our revolving credit facility and cash on hand.

 

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Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

 

The following table sets forth certain income statement data for the three-month and six-month periods ended June 30, 2017 and 2016 (dollars are shown in millions and certain amounts may not calculate due to rounding):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

 

% of

 

 

$

   

Net Sales

 

   

$

   

Net Sales

 

   

$

   

Net Sales

  

   

$

   

Net Sales

 

Net sales

$

2,475.2

 

100.0

%

 

$

2,203.9

 

100.0

%

 

$

4,894.5

 

100.0

%  

 

$

4,366.6

 

100.0

%

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

 

1,773.1

 

71.6

 

 

 

1,518.8

 

68.9

 

 

 

3,470.8

 

70.9

 

 

 

3,044.8

 

69.7

 

Gross profit (1)

 

702.1

 

28.4

 

 

 

685.1

 

31.1

 

 

 

1,423.7

 

29.1

 

 

 

1,321.8

 

30.3

 

Warehouse, delivery, selling, general and administrative expense ("S,G&A") (2)

 

475.9

 

19.2

 

 

 

455.2

 

20.7

 

 

 

952.1

 

19.5

 

 

 

904.7

 

20.7

 

Depreciation expense

 

41.7

 

1.7

 

 

 

42.0

 

1.9

 

 

 

83.5

 

1.7

 

 

 

84.5

 

1.9

 

Amortization expense

 

13.3

 

0.5

 

 

 

13.5

 

0.6

 

 

 

26.7

 

0.5

 

 

 

27.1

 

0.6

 

Operating income (2)

$

171.2

 

6.9

%

 

$

174.4

 

7.9

%

 

$

361.4

 

7.4

%

 

$

305.5

 

7.0

%


(1)

Gross profit, calculated as net sales less cost of sales, and gross profit margin, calculated as gross profit divided by net sales, are non-GAAP financial measures as they exclude 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 and gross profit margin as shown above as measures of operating performance. Gross profit and gross profit margin are important operating and financial measures, as their fluctuations can have a significant impact on our earnings. Gross profit and gross profit margin, as presented, are not necessarily comparable with similarly titled measures for other companies.

 

(2)

The 2016 amounts have been retrospectively adjusted pursuant to our adoption of accounting changes related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. See Note 2 to the Unaudited Consolidated Financial Statements for further information.

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

Dollar

 

Percentage

 

 

2017

   

2016

 

Change

 

Change

 

 

(in millions)

 

 

 

 

 

 

Net sales (three months ended)

$

2,475.2

   

$

2,203.9

   

$

271.3

   

12.3

%

Net sales (six months ended)

$

4,894.5

   

$

4,366.6

   

$

527.9

   

12.1

%

Net sales, same-store (three months ended)

$

2,428.2

   

$

2,168.7

   

$

259.5

   

12.0

%

Net sales, same-store (six months ended)

$

4,804.1

   

$

4,301.6

   

$

502.5

   

11.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

Tons

   

Percentage

 

 

2017

   

2016

 

Change

   

Change

 

 

(in thousands)

   

   

 

   

 

 

Tons sold (three months ended)

   

1,540.3

   

 

1,519.4

   

   

20.9

   

1.4

%

Tons sold (six months ended)

   

3,080.7

   

 

3,022.4

   

   

58.3

   

1.9

%

Tons sold, same-store (three months ended)

   

1,517.8

   

 

1,501.6

   

   

16.2

   

1.1

%

Tons sold, same-store (six months ended)

   

3,037.4

   

 

2,989.5

   

   

47.9

   

1.6

%

15


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

   

Price

   

Percentage

 

 

2017

   

2016

   

Change

   

Change

 

Average selling price per ton sold (three months ended)

$

1,600

   

$

1,438

   

$

162

   

11.3

%

Average selling price per ton sold (six months ended)

$

1,581

   

$

1,431

   

$

150

   

10.5

%

Average selling price per ton sold, same-store (three months ended)

$

1,592

   

$

1,431

   

$

161

   

11.3

%

Average selling price per ton sold, same-store (six months ended)

$

1,574

   

$

1,425

   

$

149

   

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons sold and average selling price per ton sold amounts exclude our toll processing sales (as we process the metal for a fee, without taking ownership of the metal). Same-store amounts exclude the results of our 2016 acquisitions.

 

Our consolidated sales were higher in the three-month and six-month periods ended June 30, 2017 compared to the same periods in 2016 due to both higher tons sold and higher metals prices. Prices for most products we sell improved in both the three-month and six-month periods ended June 30, 2017 compared to the same periods in 2016, except for alloy products, which declined in the six-month period ended June 30, 2017 compared to the same period in 2016. Our same-store average selling price has increased sequentially in each of the past five quarters. U.S. mill price increases have been supported by increases in raw material costs, including scrap, coupled with multiple trade cases filed in the U.S. that have resulted in reduced levels of imported carbon and stainless steel products.

 

End markets that continued to perform well for us include automotive, primarily through our toll processing businesses in the U.S. and Mexico, and aerospace. Heavy industry demand remained relatively steady at the low levels we experienced in 2016. Non-residential construction demand continued its slow improvement, although it remains at significantly reduced demand levels from its peak levels experienced in 2006. Demand for the products we sell to the energy (oil and gas) end market improved in the six months ended June 30, 2017 compared to the same period in 2016, but remains significantly lower than the recent peak in 2014.

 

Since we primarily purchase and sell our inventories in the “spot” market, the changes in our average selling prices generally fluctuate in accordance with the changes in the costs of the various metals we purchase. The mix of products sold can also have an impact on our average selling prices.

 

Our same-store average selling price per ton sold in the three-month and six-month periods ended June 30, 2017 increased 11.3% and 10.5%, respectively, from the comparable 2016 periods given increased mill pricing for most products we sell. As carbon steel sales represent approximately 52% of our sales dollars, changes in carbon steel prices have the most significant impact on changes in our overall average selling price per ton sold. Our major commodity selling prices changed year-over-year as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

 

Same-store

 

 

Same-store

 

 

 

Average Selling

 

Average Selling

 

Average Selling

 

Average Selling

 

 

    

Price per Ton Sold

    

Price per Ton Sold

 

Price per Ton Sold

 

Price per Ton Sold

 

 

 

(percentage change)

 

(percentage change)

 

Carbon steel