Reliance Steel & Aluminum Co. — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Reliance distributes and processes metals. Management cited lower metals prices and continued weakness in oil-and-gas demand, while same-store ton declines were less severe than industry declines.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $2,423.7 million, down 7.4% | $5,038.1 million, down 2.5% |
| Operating income | $160.2 million, down 8.8%; 6.6% of sales | $329.5 million, down 0.2%; 6.5% of sales |
| Net income attributable to Reliance | $90.2 million, down 6.5% | $191.5 million, up 4.2% |
| Diluted EPS | $1.20, versus $1.22 | $2.50, versus $2.34 |
| Gross profit margin | 27.1%, versus 25.7% | 26.3%, versus 25.5% |
Gross profit and gross margin are presented by the company as non-GAAP measures that exclude related depreciation and amortization. Lower selling prices and volumes reduced quarterly gross profit, while increased LIFO income helped lift gross margin. LIFO income was $32.5 million for Q2 and $40.0 million for the first half of 2015, compared with LIFO expense of $5.0 million and $10.0 million, respectively, in 2014.
- Cash flow and investment: First-half operating cash flow was $463.9 million, versus $109.5 million in 2014, largely reflecting working-capital movements and inventory reductions. Capital expenditures were $77.1 million, primarily for growth initiatives. Cash at June 30 was $131.9 million.
- Debt and liquidity: Total debt was $2,216.6 million at June 30, versus $2,319.1 million at year-end 2014; long-term debt was $2,094.3 million. Net debt-to-total capital was 33.9%, down from 34.9%. The company reported $856.1 million available on its $1.5 billion revolving facility, after $585.0 million drawn and $58.9 million in letters of credit. It was in compliance with material debt covenants.
- Balance sheet: Total assets were $7,691.2 million and total equity was $4,062.3 million. Current assets were $3,038.9 million and current liabilities were $711.3 million.
- Shareholder returns: First-half dividends and equivalents paid were $61.4 million. The company repurchased $200.0 million of shares in the first half and a further $71.3 million through July 30. The quarterly dividend was increased to $0.40 per share.
Material changes and management commentary
- Same-store tons sold declined 2.8% in Q2 and 1.4% in the first half, compared with industry declines of 8.3% and 5.0%, respectively. Same-store average selling price per ton fell 8.6% in Q2 and 5.2% in the first half.
- Management attributed pricing pressure to high imports, lower raw-material costs and a strong U.S. dollar. Energy-market sales, estimated at 8%–10% of total sales, fell significantly as weak oil prices reduced drilling activity. Automotive and aerospace performed well; heavy industry was reasonably resilient, while agricultural and construction equipment faced pressure.
- Management said disciplined selling, small quick-turn orders and value-added processing helped maintain gross margin within its historical 25%–27% range. S,G&A was 18.2% of Q2 sales and 17.6% of first-half sales, up from 17.0% and 17.1%, respectively, largely because lower prices reduced the sales denominator.
- First-half results included sales from 2014 acquisitions: AMS $132.1 million, Fox Metals and Alloys $14.9 million, and Northern Illinois Steel Supply $9.1 million.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expected adequate liquidity and funding to meet operating needs and anticipated continuing acquisitions and other growth activities.
- Management identified exposure to metals prices and demand, interest rates, economic conditions, competition and foreign exchange. It reported no significant change in market-risk exposures since December 31, 2014 and no material change to the risk factors in the 2014 Form 10-K.
- The company reported $572.8 million of debt obligations due before the revolving facility expires in April 2018. A $39.2 million lump-sum mortgage payment is due in October 2016. The company stated it expected sufficient liquidity to meet future needs.
- Environmental remediation obligations relate to former operations of a subsidiary; insurance had covered costs to date and was expected to cover most remaining costs. Management did not expect a material adverse impact. Other pending matters were described as routine litigation, with no expected material adverse effect.
- Goodwill was $1,732.4 million and net intangible assets were $1,195.9 million. These balances are significant relative to assets and equity and depend on impairment assessments. No goodwill impairment losses were reported at June 30.
- The company adopted debt-issuance-cost presentation guidance retrospectively, reducing both December 2014 intangible assets and long-term debt by $14.2 million. It was evaluating the new revenue-recognition standard and did not expect a material impact.
Important facts for investors to verify
- Whether metals pricing, imports and energy-market weakness continue to affect selling prices, volumes and margins.
- How much of reported margin improvement reflects LIFO income and whether inventory reductions support cash generation in subsequent periods.
- Debt maturities, especially the 2016 notes and mortgage lump-sum payment, and continued compliance with credit covenants.
- Execution and returns on growth capital expenditures and the 2014 acquisitions; monitor goodwill and intangible-asset impairment disclosures.
- Share repurchases and dividends relative to operating cash flow, liquidity needs and remaining repurchase authorization.