Reliance Steel & Aluminum Co. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing was signed February 27, 2013. This is an annual report, with unaudited quarterly results also provided. Reliance distributes and processes metals through more than 240 service-center locations in North America and other countries.
Financial performance and condition
- Sales and earnings: Net sales were $8.442 billion, up 3.8% from 2011. Net income attributable to Reliance was $403.5 million, up 17.4%; diluted EPS was $5.33 versus $4.58.
- Profitability: Gross profit was $2.207 billion and gross margin was 26.1%, compared with $1.986 billion and 24.4% in 2011. Operating income was $659.2 million (7.8% of sales), versus $572.8 million (7.0%). SG&A rose 9.1% to $1.396 billion.
- Volume and pricing: Same-store tons sold increased 3.4%, while same-store sales declined 0.6%; same-store average selling price per ton fell 4.2%. Total sales growth included acquisitions.
- Cash flow and investment: Operating cash flow was $601.9 million, versus $234.8 million in 2011. Capital expenditures were $214.0 million, and acquisitions used $166.9 million, net of cash acquired. Cash dividends paid were $60.2 million.
- Liquidity and debt: Cash was $97.6 million; working capital was $1.699 billion. Total debt was approximately $1.209 billion, down from $1.333 billion; the net debt-to-capital ratio improved to 23.8% from 28.4%. The $1.5 billion revolving facility had $525 million drawn and matures in July 2016. Reliance reported compliance with debt covenants.
- Debt service and exposure: $83.6 million of debt obligations were due within one year, including $75 million of private notes maturing in July 2013. Approximately $533.9 million of debt was variable-rate; management estimated a 1% rate increase would add about $5.3 million of annual interest expense.
Changes versus 2011 and fourth-quarter performance
- Sales rose modestly, supported by higher same-store shipments and acquisitions, but declining metal prices offset volume growth. Management said pricing generally weakened through 2012 amid lower raw-material costs, imports and domestic overcapacity.
- Gross margin improvement reflected both pricing discipline and a significant LIFO reserve effect: 2012 included a $64.1 million credit to cost of sales, compared with an $85.3 million charge in 2011. This comparison is an important contributor to the year-over-year margin change.
- Fourth-quarter sales were $1.889 billion versus $2.034 billion in fourth-quarter 2011; net income attributable to Reliance was $80.4 million versus $67.9 million, and diluted EPS was $1.06 versus $0.91. Management attributed weaker late-year demand to extended customer holiday closures and “fiscal cliff” concerns.
- Operating cash flow increased substantially as working-capital needs eased, particularly with softer demand late in the year. Inventory turns declined to about 4.0 times from 4.4 times; days sales outstanding increased to 42.1 from 41.6.
Outlook, significant developments and risks
- Management expected pricing to improve from late-2012 levels and volumes to improve gradually, while warning that global economic uncertainty could constrain growth. It said results could remain below its view of the company’s earnings capacity until demand—especially non-residential construction—improves.
- The 2013 capital expenditure budget was approximately $180 million, including growth projects; estimated maintenance spending was $60–$70 million. The company said it could scale back investment if needed.
- In February 2013, Reliance agreed to acquire Metals USA for about $786 million in equity consideration and assume approximately $452 million of debt, for an enterprise value of about $1.2 billion. Closing was expected in the second quarter of 2013, subject to shareholder and regulatory approvals and other conditions. Funding was expected to include revolving-credit borrowings and access to bank and debt capital markets.
- Key risks include cyclical customer demand; volatile metal prices and potential inventory-margin pressure; competition and supply interruptions; variable-rate debt and refinancing needs; acquisition financing and integration; environmental obligations; and tax audits. The company disclosed ongoing remediation matters relating to former EMJ operations, with insurance expected to cover most related costs, and a lawsuit related to the proposed Metals USA transaction that it did not expect to have a material adverse effect.
- Goodwill was $1.315 billion and net intangible assets were $936.5 million at year-end. No goodwill impairment was identified, but Reliance recorded a $2.5 million impairment of a trade name. KPMG issued an unqualified audit opinion on the financial statements and on internal control over financial reporting.
Most important facts for investors to verify
- How much of the 2012 gross-margin and earnings improvement reflects recurring operating performance versus the $64.1 million LIFO credit and the prior-year $85.3 million charge.
- Whether demand, metal pricing and inventory turns improved after year-end, particularly in non-residential construction and energy-related markets.
- Whether the Metals USA acquisition closed on the stated terms, how it was financed, and its effect on leverage, interest expense and integration costs.
- Near-term debt repayment and refinancing plans, covenant headroom, and exposure to floating interest rates.
- Progress on environmental remediation, tax audits and the pending transaction-related litigation.