Direct dial: (213) 576-2467
E-mail: krustand@rsac.com
August 5, 2008
VIA FACSIMILE AND OVERNIGHT COURIER
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549-3561
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Attn:
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David R. Humphrey, Branch Chief |
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Mail Stop 3561 |
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Re:
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Reliance Steel & Aluminum Co. |
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Form 10-K for year ended December 31, 2007 |
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Filed February 29, 2008 |
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File No. 1-13122 |
Dear Mr. Humphrey:
In our conversation on July 25, 2008, you requested that we supplement our letter dated July
11, 2008 in response to your letter dated June 30, 2008 and modify our responses to two of the
comments that you made in connection with your review of the Annual Report on Form 10-K for the
year ended December 31, 2007 for Reliance Steel & Aluminum Co. Accordingly, we hereby supplement
and modify our responses to Comment Nos. 2 and 5 as set forth below.
2. EBITDA. You requested that we expand the disclosure of our justification for the
inclusion of EBITDA as a liquidity measure.
RESPONSE:
As set forth previously, we believe that EBITDA is useful to management and to investors, as
well as others, in evaluating the Company’s liquidity. Management finds EBITDA useful because the
calculation generally eliminates the effects of financing costs and income taxes and the accounting
effects of capital expenditures and acquisitions, which are evaluated through other operating
performance measures. In addition, EBITDA is a common financial measure used by lenders, credit
rating agencies and other third parties, including investors, when assessing a company’s liquidity
and considering whether to extend credit or invest in debt or equity securities. Since EBITDA can
be derived from other information we present, we believe that a discussion of it is appropriate and
justifiable in our public filings. Accordingly, we propose to modify our existing discussion
contained in footnote 4 to the selected consolidated financial data in our future filings to read
as follows:
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Page 2
U.S. Securities and Exchange Commission
Attn: David R. Humphrey, Branch Chief
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August 5, 2008 |
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“EBITDA is defined as the sum of income before interest expense, income
taxes, depreciation expense and amortization of intangibles. We use EBITDA as a
liquidity measure and believe EBITDA is useful in evaluating our liquidity because
the calculation generally eliminates the effects of financing costs and income
taxes and the accounting effects of capital spending and acquisitions, which are
assessed and evaluated through other operating performance measures. EBITDA is
also commonly used as a measure of operating performance and liquidity for
companies in our industry and is frequently used by analysts, investors, lenders,
rating agencies and other interested parties to evaluate a company’s financial
performance and its ability to incur and service debt. We consider certain
leverage ratios, including debt-to EBITDA, when assessing growth opportunities and
evaluating our financial flexibility and the likelihood of an impact on our credit
rating, which is an important part of our financial strategy. A downgrade in our
credit rating could limit our ability to access capital and/or increase our
borrowing costs. When discussing our leverage targets with rating agencies, we
focus on the following two measures: (1) maintaining a specified debt to
capitalization ratio and (2) maintaining a specified debt to EBITDA ratio. We
believe that these are two of the key criteria that the rating agencies focus on
when assigning and monitoring our credit rating, as these are key measures
discussed in their public reports. EBITDA is not a recognized measurement under
U.S. generally accepted accounting principles and, therefore, represents a
non-GAAP financial measure. EBITDA should not be considered in isolation or as a
substitute for consolidated statements of income and cash flows data prepared in
accordance with U.S. generally accepted accounting principles as it excludes
components that are significant in understanding and assessing our results of
operations and cash flows. EBITDA as presented is not necessarily comparable with
similarly titled measures for other companies.”
As stated, we continue to believe that EBITDA is an important measurement for our lenders, the
holders of our debt and equity securities and the credit rating agencies and, accordingly, propose
to retain the discussion in our future filings, modified as set forth above.
5. Summary Purchase Price Allocation Information. You asked us to amend our Form 10-K.
RESPONSE:
We understand from our further conversations with you that, because our Annual Report on Form
10-K referred to a third-party valuation specialist that we did not identify, you have requested
that, before we draw down on any registration statement or file any subsequent registration
statement incorporating that Annual Report on Form 10-K by reference, we amend the Annual Report on
Form 10-K for the year ended December 31, 2007 either to (i) identify the third-party valuation
specialist and obtain a consent to be filed as an exhibit to the registration statement or (ii)
delete the reference to the third-party valuation specialist. Accordingly, we are amending our
Annual Report on Form 10-K to delete the reference to the third-party valuation specialist. We
have enclosed a copy of the changed page of that Form 10-K/A for your information.
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2007
2005 Acquisition
Acquisition of Chapel Steel Corp.
On July 1, 2005, the Company acquired 100% of the outstanding capital stock of Chapel Steel
Corp. (“Chapel Steel”), headquartered in Spring House (Philadelphia), Pennsylvania. The Company
paid approximately $94,200,000 in cash for the equity of Chapel Steel and assumed approximately
$16,800,000 of Chapel Steel’s debt. The Chapel Steel sellers were paid an additional amount in
2006 related to the Company’s election of Section 338(h)(10) treatment for income tax purposes,
resulting in a goodwill addition of $894,000 for the year ended December 31, 2006.
Chapel Steel was a privately held metals service center company founded in 1972 that processes
and distributes carbon and alloy steel plate products from five facilities in Pottstown
(Philadelphia), Pennsylvania; Bourbonnais (Chicago), Illinois; Houston, Texas; Birmingham, Alabama;
and Portland, Oregon. Chapel Steel also warehouses and distributes its products in Cincinnati, Ohio
and Hamilton, Ontario, Canada. Chapel Steel operates as a wholly-owned subsidiary of RSAC
Management Corp.
The acquisition was funded on July 1, 2005 with borrowings on the Company’s syndicated credit
facility. The following table summarizes the allocation of the total purchase price to the fair
values of the assets acquired and liabilities assumed of Chapel Steel at the date of the
acquisition:
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(in thousands) |
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Cash |
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21 |
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Accounts receivable |
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24,549 |
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Inventory |
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26,261 |
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Property, plant and equipment |
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11,076 |
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Goodwill |
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43,843 |
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Intangible assets subject to amortization |
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10,700 |
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Intangible assets not subject to amortization. |
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19,000 |
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Other current and long-term assets |
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1,293 |
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Total assets acquired |
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136,743 |
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Capital lease obligations |
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(6,332 |
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Borrowings on line of credit |
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(16,780 |
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Other current liabilities |
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(18,342 |
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Total liabilities assumed |
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(41,454 |
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Net assets acquired |
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95,289 |
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Summary purchase price allocation information for all acquisitions
All of the acquisitions discussed in this note have been accounted for under the purchase
method of accounting and, accordingly, each purchase price has been allocated to the assets
acquired and liabilities assumed based on the 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 financial statements
reflect the allocations of each acquisition’s purchase price as of December 31, 2007 or 2006, as
applicable.
As part of the purchase price allocations of the 2007, 2006, and 2005 acquisitions,
$47,218,000, $210,800,000 and $19,000,000, respectively, were allocated to the trade names
acquired, none of which is subject to amortization. The Company determined that the trade name
acquired in connection with these acquisitions had indefinite lives since their economic lives are
expected to approximate the life of each company acquired. Additionally, the Company recorded
other identifiable intangible assets related to customer relationships for 2007, 2006, and 2005
acquisitions of $62,038,000, $89,300,000 and $10,600,000, respectively, with weighted average lives
of 23.6, 25.1 and 8.5 years, respectively. The goodwill amounts from all of the acquisitions are
expected to be deducted for tax purposes in future years
with the exception of the Crest and EMJ goodwill amounts.