Reliance Steel & Aluminum Co. — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Reliance operates one reportable segment: metals service centers, distributing and processing metals. All dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $2,025.3 | $2,288.3 |
| Gross profit / margin | $528.8 / 26.1% | $577.8 / 25.3% |
| Operating income / margin | $130.0 / 6.4% | $184.6 / 8.1% |
| Net income attributable to Reliance | $83.7 | $116.2 |
| Diluted EPS | $1.09 | $1.54 |
| Cash dividends per share | $0.30 | $0.15 |
| Cash from operating activities | $72.2 | ($63.2) |
| Capital expenditures | $26.8 | $34.6 |
- Sales declined 11.5%; same-store sales fell 13.6%. Tons sold decreased 5.8% overall and 6.9% same-store, while average selling price per ton fell 6.5% overall and 7.7% same-store.
- Gross profit dollars fell 8.5%, but gross margin increased 0.8 percentage point. Management attributed the margin improvement to reducing selling prices less than product costs declined.
- Operating income decreased 29.6% and Reliance-attributable net income decreased 28.0%. S,G&A was flat in dollars at $357.7, but rose to 17.7% of sales from 15.6%; depreciation and amortization increased 15.8% to $41.1.
- Operating cash flow improved by $135.4 year over year, primarily reflecting lower working-capital investment as demand weakened. Receivables and inventory uses of cash were $134.8 and $48.2, respectively.
Financial position, debt and liquidity
- At March 31, cash was $100.1; current assets were $2,426.4 and current liabilities $671.2.
- Total debt was $1,151.9, down from $1,208.9 at year-end 2012; long-term debt was $1,063.8. Net debt-to-total capital was 22.4%, versus 23.8% at year-end. The company reported $436.9 of debt obligations due before the revolving facility expires in April 2018, including $75.0 of notes maturing July 2013.
- The $1.5 billion revolving facility had $465.0 outstanding at quarter-end. On April 4, the company amended and extended its credit agreement through April 2018 and added a $500.0 term loan.
- On April 12, after quarter-end, Reliance issued $500.0 of 4.50% senior notes due 2023 and acquired Metals USA for $786.0 cash plus assumed debt of $466.0, approximately $1.25 billion total transaction value. Management reported pro forma leverage of approximately 39% after the acquisition.
- Debt covenants were met at quarter-end: interest coverage was 10.6 times versus a 3.0-times minimum; leverage was 24.5% versus a 60% maximum. Management said it expected adequate cash flow and credit capacity for debt service, operations, investment and dividends.
Management commentary, outlook and risks
- Management cited economic uncertainty, weaker activity in most end markets, lower metal prices, reduced volumes, one fewer shipping day and the early Easter holiday as pressures on Q1 results. Auto exposure increased; aerospace and energy remained comparatively strong, while non-residential construction continued a slow recovery but remained below peak levels.
- Lower mill prices drove lower average selling prices. Same-store prices declined for carbon steel 9.6%, aluminum 3.8%, stainless steel 12.6% and alloy 9.3%. The LIFO inventory adjustment was a $5.0 benefit in Q1 2013 versus a $7.5 expense in Q1 2012.
- The effective tax rate fell to 29.5% from 33.2%, favorably affected by settlement of certain tax matters. Other income also declined, partly because of reversals of foreign-currency gains.
- The board raised the Q1 dividend 20% to $0.30 per share and declared a Q2 dividend of $0.30 per share. Management anticipated continuing acquisitions and growth initiatives, funded by operating cash flow and borrowings; no specific earnings or sales guidance was provided.
- On April 30, Reliance acquired a real-estate holding company for $75.6, including assumed net debt of $40.5. Environmental remediation at former EMJ manufacturing sites could involve significant costs, though insurance was expected to cover most costs; the company did not expect a material adverse impact.
- Market risks include economic and end-market demand conditions, metal prices, interest rates and foreign exchange. The filing reported no material changes to previously disclosed risk factors, and no significant goodwill impairment was identified in the latest annual test. Goodwill was $1.31 billion and net intangible assets were $922.3 million at quarter-end.
Important facts for investors to verify
- Metals USA integration, acquisition financing, realized synergies and the impact of the reported pro forma leverage on future debt and interest costs.
- Whether lower volumes and metal prices persist, and whether the Q1 gross-margin improvement and LIFO benefit are sustainable.
- Working-capital needs and cash generation as demand, prices and inventory levels change.
- Repayment or refinancing of the $75.0 million July 2013 notes and compliance with debt covenants after the acquisitions and financing transactions.
- Performance of major end markets, particularly construction, energy and aerospace, and potential impairment exposure associated with goodwill and intangible assets.
- Extent and timing of environmental remediation costs and insurance recoveries; the filing does not provide a clear estimate of total potential cleanup costs.