The accompanying consolidated financial statements include the accounts of Reliance Steel & Aluminum Co. and its subsidiaries (collectively referred to as "Reliance", "the Company", "we", "our" or "us"). The Company's consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries. The ownership of the other interest holders of consolidated subsidiaries is reflected as noncontrolling interests. The Company's investments in unconsolidated subsidiaries are recorded under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.

The Company operates a metals service center network of more than 220 locations in 38 states, Belgium, Canada, China, Malaysia, Mexico, Singapore, South Korea, the U.A.E. and the United Kingdom that provides value-added metals processing services and distributes a full line of more than 100,000 metal products. Since its inception in 1939, the Company has not diversified outside its core business as a metals service center operator.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, such as accounts receivable collectability, valuation of inventories, goodwill, long-lived assets, income tax and other contingencies, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of credit risk with respect to trade receivables are limited due to the geographically diverse customer base and various industries into which the Company's products are sold. Trade receivables are typically non-interest bearing and are initially recorded at cost. Sales to the Company's recurring customers are generally made on open account terms while sales to occasional customers may be made on a C.O.D. basis when collectability is not assured. Past due status of customer accounts is determined based on how recently payments have been received in relation to payment terms granted. Credit is generally extended based upon an evaluation of each customer's financial condition, with terms consistent in the industry and no collateral required. Losses from credit sales are provided for in the financial statements and consistently have been within the allowance provided. The allowance is an estimate of the uncollectability of accounts receivable based on an evaluation of specific customer risks along with additional reserves based on historical and probable bad debt experience. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible. As a result of the above factors, the Company does not consider itself to have any significant concentrations of credit risk.

A significant portion of our inventory is valued using the last-in, first-out ("LIFO") method, which is not in excess of market. Under this method, older costs are included in inventory, which may be higher or lower than current costs. This method of valuation is subject to year-to-year fluctuations in cost of material sold, which is influenced by the inflation or deflation existing within the metals industry as well as fluctuations in our product mix and on-hand inventory levels.

Fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities, and the current portion of long-term debt approximate carrying values due to the short period of time to maturity. Fair values of long-term debt, which have been determined based on borrowing rates currently available to the Company, or to other companies with comparable credit ratings, for loans with similar terms or maturity, approximate the carrying amounts in the consolidated financial statements with the exception of our $600 million publicly traded senior unsecured notes. The fair values of these senior unsecured notes based on quoted market prices as of December 31, 2011 and 2010 were approximately $638.1 million and $612.1 million, respectively, compared to their carrying values of approximately $598.4 million and $598.2 million, as of the end of each period, respectively.

The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents with high-credit, quality financial institutions. The Company, by policy, limits the amount of credit exposure to any one financial institution. At times, cash balances held at financial institutions were in excess of federally-insured limits.

Goodwill is the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized but is tested for impairment at least annually.

For purposes of performing annual goodwill impairment tests, the Company identified reporting units in accordance with the guidance provided within the Segment Reporting topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("Codification"). The Company tests for impairment of goodwill by assessing qualitative factors to determine if the fair value of a reporting unit is more likely than not below the carrying value of the reporting unit. The Company also calculates the fair value of a reporting unit using the discounted cash flow method, as necessary, and compares the fair value to the carrying value of a reporting unit to determine if impairment exists. Under the discounted cash flow method, the fair value of each reporting unit is estimated based on expected future economic benefits discounted to a present value at a rate of return commensurate with the risk associated with the investment. Projected cash flows are discounted to present value using an estimated weighted average cost of capital, which considers returns to both equity and debt investors. The Company performs the required annual goodwill impairment evaluation on November 1 of each year. No impairment of goodwill was determined to exist for the years ended December 31, 2011, 2010, or 2009.

Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and the current changing market conditions may impact the Company's assumptions as to commodity prices, demand and future growth rates or other factors that may result in changes in estimates of future cash flows. Although the Company believes the assumptions used in testing for impairment are reasonable, significant changes in any one of the Company's assumptions could produce a significantly different result. Additionally, significant declines in the market conditions for the Company's products as well as in the price of its common stock could also significantly impact the impairment analysis. An impairment charge, if incurred, could be material.

Property, plant and equipment is recorded at cost (or at fair value for assets acquired in connection with business combinations) and the provision for depreciation of these assets is generally computed on the straight-line method at rates designed to distribute the cost of assets over the useful lives, estimated as follows:

Other intangible assets with finite useful lives are amortized over their useful lives. Other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. No impairment of intangible assets with indefinite lives was determined to exist for the years ended December 31, 2011, 2010, or 2009.

The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things, assumptions about future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. Long-lived asset related impairment losses recognized during the years ended December 31, 2011, 2010 and 2009 were not significant.

The Company recognizes revenue from product or processing sales upon concluding that all of the fundamental criteria for product revenue recognition have been met, such as a fixed or determinable sales price; reasonable assurance of collectability; and passage of title and risks of ownership to the buyer. Such criteria are usually met upon delivery to the customer for orders with FOB destination terms or upon shipment for orders with FOB shipping point terms, or at the time toll processing services are performed. Considering the close proximity of our customers to our metals service center locations, shipment and delivery of our orders generally occur on the same day. Billings for orders where the revenue recognition criteria are not met, which primarily include certain bill and hold transactions (in which our customers request to be billed for the material but request delivery at a later date), are recorded as deferred revenue.

Shipping and handling charges to our customers are included as revenue in Net sales. Costs incurred in connection with shipping and handling the Company's products, which are related to third-party carriers are not material and are typically included in Cost of sales. Costs incurred in connection with shipping and handling the Company's products that are performed by Company personnel are typically included in operating expenses. For the years ended December 31, 2011, 2010 and 2009, shipping and handling costs included in Warehouse, delivery, selling, general and administrative expenses were approximately $220.9 million, $190.1 million, and $179.8 million, respectively.

Our operating segments have been aggregated into one reportable segment, metals service centers, based on the similar economic characteristics criteria as our operating segments have a similar long-term business model, operate at similar gross profit margins, have similar expense structures, and have similar working capital needs. All of our recent acquisitions were metals service centers and did not result in new reportable segments. Although a variety of products or services are sold at our various locations, in total, sales were comprised of the following in each of the three years ended December 31:



Carbon steel	53	%	52	%	56	%
Aluminum	15		18		18
Stainless steel	15		16		13
Alloy steel	10		8		7
Toll processing	2		2		2
Other	5		4		4

Total	100	%	100	%	100	%

The following table summarizes consolidated financial information of the Company's operations by geographic location based on where sales originated from:

	United States		Foreign Countries		Total

			(in millions)
Year Ended December 31, 2011
Net sales	$	7,647.4	$	487.3	$	8,134.7
Long-lived assets		3,035.1		296.1		3,331.2
Year Ended December 31, 2010
Net sales		6,023.6		289.2		6,312.8
Long-lived assets		2,807.8		160.2		2,968.0
Year Ended December 31, 2009
Net sales		5,122.2		195.9		5,318.1
Long-lived assets		2,762.6		153.3		2,915.9

All of the Company's share-based compensation plans are considered equity plans under U.S. GAAP. The Company calculates the fair value of stock option awards on the date of grant based on the closing market price of the Company's common stock, using a Black-Scholes option-pricing model. The fair value of restricted stock grants is determined based on the fair value of the Company's common stock on the date of the grant. The fair value of stock option and restricted stock awards is expensed on a straight-line basis over their respective vesting periods, net of estimated forfeitures. The share-based compensation expense recorded was $21.3 million, $17.3 million, and $15.5 million for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in the Warehouse, delivery, selling, general and administrative expense caption of the Company's consolidated statements of income.

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The Company's management is not aware of any environmental remediation obligations that would materially affect the operations, financial position or cash flows of the Company. See Note 14 for further discussion on the Company's environmental remediation matters.

The Company files a consolidated U.S. federal income tax return with certain wholly-owned subsidiaries. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change. The provision for income taxes reflects the taxes to be paid for the period and the change during the period in the deferred tax assets and liabilities. The Company evaluates on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

The Company regularly makes a comprehensive review of its uncertain tax positions. Tax benefits are recognized when it is more-likely-than-not that a tax position will be sustained upon examination by the authorities. The benefit from a position that has surpassed the more-likely-than-not threshold is the largest amount of benefit that is more than 50% likely to be realized upon settlement. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense.

The currency effects of translating the financial statements of those foreign subsidiaries of the Company, which operate in local currency environments, are included in the Accumulated other comprehensive (loss) income component of Reliance shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the results of operations in the Other income (expense), net caption and amounted to a net loss of $5.9 million for the year ended December 31, 2011 and a net gain of $0.2 million for the years ended December 31, 2010 and 2009.

Goodwill Impairment—On October 1, 2011, the Company adopted changes issued by the FASB related to testing goodwill for impairment. The new guidance allows companies the option to assess qualitative factors to determine if it is more-likely-than-not that goodwill is impaired and whether it is necessary to perform further impairment testing. The new guidance also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of these changes did not have a material impact on the Company's consolidated financial statements.

On January 1, 2011, the Company adopted changes issued by the FASB related to the calculation of the carrying amount of a reporting unit when performing the first step of a goodwill impairment test. More specifically, the changes require an entity to use an equity premise when performing the first step of a goodwill impairment test. If a reporting unit has a zero or negative carrying amount, the entity must assess and consider qualitative factors and whether it is more likely than not that goodwill impairment exists. The adoption of these changes did not have a material impact on the Company's consolidated financial statements.

Fair Value Measurements and Disclosures—In January 2010, the FASB issued new accounting guidance providing clarification on existing requirements and requiring additional disclosures on transfers in and out of Levels 1 and 2 fair value measurement classifications. The clarification of existing requirements and new disclosures were effective for interim and annual reporting periods beginning after December 15, 2009. On January 1, 2010, the Company adopted the new accounting guidance. The adoption of all these changes did not have a material effect on the Company's consolidated financial statements.

Consolidation of Variable Interest Entities—In June 2009, the FASB issued accounting guidance intended to replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The revised approach is intended to be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The literature also requires additional disclosures about a reporting entity's involvement in variable interest entities, which enhances the information provided to users of financial statements. On January 1, 2010, the Company adopted the new accounting guidance. As a result of the adoption, the Company consolidated the assets, liabilities, and results of operations of a joint venture entity, which was previously recorded under the equity method of accounting. The joint venture is not material to the Company's consolidated financial statements.

In June 2011, the FASB issued accounting guidance, which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. The new guidance is effective for the Company's interim and annual reporting periods beginning in the first quarter of 2012 and will be applied retrospectively, with early adoption permitted. The Company does not expect the adoption of this new guidance to have a material impact on the Company's consolidated financial statements, other than the change in presentation described in the new guidance.

In May 2011, the FASB issued accounting guidance to provide a consistent definition of fair value and to ensure that the fair value measurement and disclosure requirements are similar between generally accepted accounting principles in the United States and International Financial Reporting Standards. The new guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The new guidance is effective for the Company's interim and annual reporting periods beginning in the first quarter of 2012 and will be applied prospectively. The Company is currently evaluating the impact of adopting the new guidance, but currently believes there will be no significant impact on its consolidated financial statements.