Reliance Steel & Aluminum Co. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Reliance distributes and processes metals across a range of end markets. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Third quarter 2020 | Third quarter 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,085.6 million | $2,685.9 million | $6,677.8 million | $8,526.0 million |
| Gross profit margin | 32.4% | 30.3% | 31.0% | 29.7% |
| Operating income | $160.5 million | $241.2 million | $382.4 million | $788.6 million |
| Net income attributable to Reliance | $97.6 million | $162.7 million | $239.5 million | $535.9 million |
| Diluted earnings per share | $1.51 | $2.40 | $3.66 | $7.90 |
Gross profit margin is a company-presented measure that excludes related depreciation and amortization. For the nine-month period, the margin was 31.6% excluding $39.6 million of restructuring-related inventory provisions.
- Revenue and volumes: Sales fell 22.4% in the quarter and 21.7% year to date. Same-store tons sold declined 13.2% and 11.7%, respectively; average selling price per ton declined 11.6% and 11.8%. Lower demand, metal prices and product mix contributed.
- Profitability: Third-quarter pretax income was $127.0 million, down 41.8%; nine-month pretax income was $312.1 million, down 56.6%. Pretax margins were 6.1% and 4.7%, compared with 8.1% and 8.4% in the comparable periods. Lower sales and unusual charges weighed on results, while higher gross margins and lower SG&A partly offset the declines.
- Cash flow: Nine-month operating cash flow was $942.8 million versus $954.1 million. Capital expenditures were $134.7 million, producing company-reported free cash flow of $808.1 million, up 4.8% from the prior-year period.
- Liquidity and debt: At September 30, cash was $591.6 million; total debt was $1.664 billion, compared with $1.596 billion at year-end 2019. Net debt-to-total capital was 17.3%, down from 21.4%. The $1.5 billion revolving facility had no borrowings and $1.46 billion available, after $37.1 million of letters of credit. The company reported $912.7 million of debt obligations due before the facility expires in September 2025.
- Capital returns: Nine-month dividends and dividend equivalents paid were $122.8 million; share repurchases were $300.2 million. The quarterly dividend was $0.625 per share, and the board declared the same amount for the fourth quarter.
Material changes and unusual items
- Reliance issued $900 million of senior unsecured notes in August: $400 million at 1.30% due 2025 and $500 million at 2.15% due 2030. Proceeds helped repay outstanding revolving-credit and term-loan borrowings, extending the debt maturity profile.
- Impairment and restructuring charges totaled $14.6 million in the third quarter and $157.7 million for the first nine months, mainly reflecting weaker energy and commercial aerospace outlooks, COVID-related downsizing and planned facility closures. Nine-month charges included $98.5 million of intangible-asset impairments and $39.6 million of restructuring inventory provisions.
- Other expense included postretirement benefit plan settlement charges of $14.6 million for the quarter and $19.4 million year to date. Management said impairment, restructuring and other non-recurring items reduced diluted EPS by $0.36 for the quarter and $2.05 year to date.
- In March, the company acquired the remaining 49% interest in Feralloy Processing Company for $8.0 million, increasing ownership to 100%. The 2019 Fry Steel acquisition contributed $60.9 million in sales during the first nine months of 2020.
Outlook, management commentary and risks
Management said demand improved in most served end markets in the third quarter compared with the second quarter, including a significant rebound in automotive toll-processing volumes. Commercial aerospace and energy remained weak; military, defense and space demand remained strong. Management expected fourth-quarter tons sold to decline sequentially due to seasonal factors and fewer shipping days, while overall demand was expected to improve slowly. No specific earnings or sales guidance was provided.
The 2020 capital expenditure budget was raised from approximately $190 million to $270 million for customer-service opportunities, including expanded tolling capabilities, and equipment maintenance and upgrades. Management said liquidity should be adequate for operations, investment, debt repayment, dividends and opportunistic repurchases, but could not estimate the pandemic’s ultimate effects.
- COVID-19-related uncertainty could further reduce demand, disrupt operations and supply chains, affect financing access, or lead to additional restructuring and impairment charges. Same-store third-quarter tons remained 12.6% below first-quarter 2020 levels.
- Goodwill was $1.925 billion and net intangible assets were $955.8 million at quarter-end. The company noted further market deterioration could cause additional impairment; valuations rely on significant assumptions, including revenue forecasts and discount rates.
- The company reported compliance with its debt covenants. Interest coverage was 12.4 times versus a 3.0-times minimum; its covenant leverage ratio was 25.9% versus a 60% maximum.
- Management did not expect routine litigation or the disclosed environmental remediation matter to materially affect financial position, results or cash flows; insurance was expected to cover most remediation costs.
Important facts for investors to verify
- Whether demand and pricing stabilize, particularly in commercial aerospace, energy, automotive and non-residential construction.
- Whether margins and cash generation remain resilient as sales volumes and selling prices change, including the effect of LIFO adjustments and restructuring provisions.
- Whether further impairment or restructuring charges arise and how key valuation assumptions develop.
- Debt maturities, access to the revolving facility, covenant headroom and the impact of planned capital spending, dividends and buybacks on liquidity.
- The pace and extent of COVID-19 effects on customers, facilities, suppliers and capital markets; management stated the full impact could not be reasonably estimated.