Reliance, Inc. (Reliance Steel & Aluminum Co.) — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone Q4 filing. Reliance operates more than 300 metals service centers in the U.S. and 13 other countries, distributing over 100,000 products and providing processing services. It reported one segment: metals service centers.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $10.974 billion | $11.535 billion | Down 4.9% |
| Gross profit / margin* | $3.329 billion / 30.3% | $3.282 billion / 28.4% | Profit up 1.5%; margin up 1.9 points |
| Operating income / margin | $1.014 billion / 9.2% | $937.5 million / 8.1% | Up 8.1% |
| Net income attributable to Reliance | $701.5 million | $633.7 million | Up 10.7% |
| Diluted EPS | $10.34 | $8.75 | Up 18.2% |
| Cash from operations | $1.302 billion | $664.6 million | Up 95.8% |
Q4 snapshot: Sales were $2.448 billion versus $2.814 billion in Q4 2018; net income attributable to Reliance was $165.6 million versus $85.6 million, and diluted EPS was $2.44 versus $1.22. Gross profit was $794.2 million versus $709.8 million; the resulting gross margins were approximately 32.4% and 25.2%, respectively.*
Cash, liquidity and debt: Year-end cash was $174.3 million and working capital was $2.335 billion. Total debt was $1.596 billion, down from $2.214 billion a year earlier; net debt-to-total capital fell to 21.4% from 30.8%. The company had $1.09 billion available on its revolving facility. It repaid approximately $618 million of net debt during 2019. Net cash used in investing was $419.1 million and net cash used in financing was $840.6 million. Capital expenditures were a record $242.2 million.
Operating indicators: Same-store tons sold fell 4.2%, while same-store average selling price per ton fell 1.8%. Value-added processing covered 51% of shipped orders, compared with 49% in 2018. Approximately 40% of orders were delivered within 24 hours.
Changes, outlook and material items
- Despite lower sales, stronger margins and earnings reflected operating execution, increased value-added processing, and lower impairment charges. Industry shipments declined 7.2%; Reliance’s same-store volume decline was less severe.
- A major earnings factor was the LIFO inventory reserve: a $156.0 million credit to cost of sales in 2019, compared with a $271.8 million charge in 2018. This reflects falling metal costs and should be considered when assessing the year-over-year margin improvement.
- 2018 included $37.0 million of impairment charges and $2.5 million of restructuring charges, primarily related to downsizing an energy business; 2019 impairment charges were $1.2 million.
- Reliance acquired Fry Steel on December 31, 2019, funded with cash and revolving-credit borrowings. No Fry Steel sales were included in 2019 results. The preliminary purchase-price allocation included $130.8 million of goodwill.
- Management did not provide earnings or revenue guidance in the supplied filing text. It budgeted approximately $250 million of capital expenditures for 2020, while noting that investment decisions would depend on economic conditions; estimated annual maintenance capex was $90–$100 million. Management said existing liquidity was adequate for operations, strategic initiatives, dividends and share repurchases.
- The regular quarterly dividend was increased to $0.625 per share in February 2020. In 2019 the company paid $151.3 million in dividends and repurchased $50.0 million of shares.
- Debt maturities warrant attention: the revolving facility matures September 2021, alongside a $375 million final term-loan payment; $506 million of debt is scheduled for 2023. The company reported compliance with its financial covenants at year-end.
- Other items to monitor include a planned 2020 termination of a frozen defined-benefit pension plan, with settlement charges dependent on market conditions and not yet estimable; environmental remediation at a former subsidiary operation, for which insurance is expected to cover most costs; and potential exposure from multiemployer pension plans, some of which are in endangered or critical status.
Risks and reporting
Key risks include metal-price volatility and inventory losses when prices fall, inability to pass through cost changes, cyclical demand, tariffs and trade-policy changes, supplier availability, competition, customer credit losses, acquisitions and integration, international operations and foreign exchange, variable-rate debt, and the LIBOR transition. The company disclosed $846.3 million of variable-rate debt; a 100-basis-point rate increase would add about $8.5 million in annual interest expense. Goodwill and intangible assets are substantial and subject to impairment judgments. Routine litigation was not expected to have a material impact. KPMG issued unqualified opinions on the financial statements and internal controls; the filing identifies asset recoverability assessments as a critical audit matter.
Investor verification points
- Assess how much of the record 30.3% gross margin and earnings growth came from the $156.0 million LIFO credit versus recurring operating improvements.
- Review demand, metal pricing, inventory levels and margins after year-end, especially given declining 2019 sales and carbon-steel pricing.
- Confirm the company’s refinancing and repayment plan for the 2021 facility and term-loan maturities and the 2023 notes.
- Track the returns on the elevated growth-capex program and the integration and performance of Fry Steel.
- Monitor the pension-plan termination costs, environmental remediation recoveries, and any developments in multiemployer-plan obligations.
*The company defines gross profit and gross margin excluding associated depreciation and amortization; these are non-GAAP measures and may not be comparable with similarly titled measures at other companies.