Business context and reporting period
Reliance Steel & Aluminum Co. (NYSE: RS) filed this unaudited Form 10-Q for the three months ended March 31, 2019. It distributes and processes metals across diverse products, geographies, and end markets. Comparisons below are with Q1 2018 unless otherwise noted; dollar amounts are in millions except per-share data.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Net sales | $2,956.6 | $2,757.1; up 7.2% |
| Gross profit and margin | $866.9; 29.3% | $819.9; 29.7% |
| Operating income and margin | $280.8; 9.5% | $246.4; 8.9% |
| Net income attributable to Reliance | $190.1 | $169.0; up 12.5% |
| Diluted EPS | $2.80 | $2.30; up 21.7% |
| Cash from operating activities | $117.2 | $13.3 |
| Cash and cash equivalents | $133.6 | $128.2 at Dec. 31, 2018 |
| Total debt | $2,197.3 | $2,214.2 at Dec. 31, 2018 |
- Same-store tons sold fell 6.0%, while same-store average selling price per ton rose 12.8%. Management attributed higher prices largely to Section 232 tariffs; demand was somewhat lower and the quarter had one fewer shipping day.
- Interest expense increased to $24.2 from $19.3, mainly due to higher rates on revolving-credit borrowings. The effective tax rate was 25.0%, versus 24.0%.
- Investing cash outflow was $48.7, including $53.0 of capital expenditures; financing cash outflow was $65.4. The company made no share repurchases in Q1 2019, compared with $49.3 in Q1 2018.
- Working capital included accounts receivable of $1,422.0 and inventory of $1,936.9. Net debt-to-total capital was 29.8%, down from 30.8% at year-end.
- Liquidity included $535.2 available on the revolving credit facility, in addition to cash. The company reported $141.3 of debt obligations due before the revolver expires in September 2021.
Material changes, outlook, and risks
Revenue growth reflected higher metals pricing, while same-store volume declined. Gross profit dollars rose, but gross margin eased 0.4 percentage points year over year. Management said higher selling prices, pricing discipline, and a focus on higher-margin orders supported profitability; the 29.3% gross margin exceeded its estimated sustainable range of 27%–29%. S,G&A fell to 18.0% of sales from 18.8%, reflecting higher sales levels.
Management described demand as strong in automotive and aerospace and steady in non-residential construction, heavy industry, and energy. It emphasized working-capital management, profitability, growth initiatives, and shareholder returns. It expressed confidence in liquidity and anticipated continuing acquisition, growth, and shareholder-return activities, but the filing provides no specific financial guidance.
The Q1 2019 LIFO inventory reserve produced a $12.5 credit to cost of sales, compared with a $25.0 charge in Q1 2018. Adoption of the lease standard on January 1, 2019 added $186.3 of right-of-use assets and $187.1 of lease liabilities, without a material impact on income, equity, or cash flows. The company reported compliance with debt covenants; interest coverage was 11.3x against a 3.0x minimum, and its covenant leverage ratio was 31.6% against a 60% maximum.
Risks include changes in metals prices, demand and availability, interest rates, foreign exchange, and general economic conditions. The company said there were no material changes to the risk factors in its 2018 Form 10-K. It disclosed an environmental remediation matter related to former subsidiary operations; insurance was expected to cover most costs, and the company did not expect a material adverse impact. Other pending litigation was described as routine and not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pricing support from tariffs and metals markets persists, and whether volume trends recover or weaken.
- How the Q1 LIFO reserve credit affected reported gross margin and how subsequent inventory-price movements may affect results.
- Working-capital conversion, particularly receivables and inventory, given their substantial cash-flow effects.
- Debt maturities, variable-rate exposure, revolver availability, and continued covenant compliance.
- Recoverability of goodwill and intangible assets, which together totaled about $2.93 billion at quarter-end.
- Developments in the environmental remediation matter and related insurance coverage.