Reliance Steel & Aluminum Co. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The filing identifies the registrant as Reliance Steel & Aluminum Co. Financial statements are unaudited.
Business context and results
Reliance operates metals service centers, distributing and processing metals. It reported one operating and reportable segment. Management said activity improved in most markets; energy, aerospace, farm and heavy equipment, and automotive toll processing were among the strongest. Non-residential construction remained comparatively weak.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,209.7m | $2,049.5m | $4,498.0m | $3,962.2m |
| Gross profit / margin* | $569.4m / 25.8% | $510.8m / 24.9% | $1,147.2m / 25.5% | $1,017.1m / 25.7% |
| Operating income / margin | $186.2m / 8.4% | $165.6m / 8.1% | $370.8m / 8.2% | $320.4m / 8.1% |
| Net income attributable to Reliance | $108.8m | $98.7m | $225.0m | $191.0m |
| Diluted EPS | $1.44 | $1.31 | $2.98 | $2.54 |
*Gross profit and gross margin are non-GAAP measures as presented by the company; they exclude depreciation and amortization associated with sales.
Material changes versus prior year
- Sales grew 7.8% in Q2 and 13.5% for the first half. Same-store sales rose 1.4% and 7.0%, respectively; same-store tons sold increased 7.1% and 8.6%.
- Average selling price per ton fell 2.2% in Q2 but rose 1.5% for the first half. Same-store prices declined 5.6% and 1.6%, respectively, reflecting lower mill pricing and commodity costs; acquisitions, particularly specialty alloy businesses, lifted reported average prices.
- Operating income increased 12.4% in Q2 and 15.7% for the first half. Net income attributable to Reliance rose 10.2% and 17.8%. Management attributed gains to higher demand and gross profit dollars, moderate expense growth, and acquired businesses.
- Q2 gross margin improved year over year, partly reflecting a $7.5m LIFO credit versus a $25.0m LIFO expense in Q2 2011. First-half 2012 had no LIFO adjustment, compared with a $45.0m expense in the first half of 2011.
Cash flow, liquidity and debt
- First-half operating cash flow was $21.2m, versus cash used of $85.5m in 2011. Increased demand drove working-capital investment: receivables rose $98.6m and FIFO inventories rose $183.4m from year-end; accounts payable and other liabilities decreased $14.8m.
- Investing cash outflow was $167.3m, including $86.8m of capital expenditures and $82.3m spent on acquisitions, net of cash acquired. Financing cash inflow was $155.1m; cash increased $9.0m to $93.6m.
- Total debt was $1.53bn at June 30, up from $1.33bn at year-end; net debt-to-total capital was 29.9%, versus 28.4%. Revolver borrowings were $845m under a $1.5bn facility maturing July 2016. The facility had $33m of letters of credit outstanding and $217m of additional letter-of-credit capacity.
- Current assets were $2.61bn and current liabilities $575.4m. The company reported $87.8m of debt obligations due before the revolver expires. It stated that operating cash flow and facility capacity should meet debt, working-capital, capital spending, growth and dividend needs.
- Debt covenants were met. The 12-month interest coverage ratio was 10.4 times against a 3.0-times minimum; covenant leverage was 31.7% against a 60% maximum. Shareholders’ equity was $3.37bn versus a $1.09bn minimum net-worth requirement.
Acquisitions, outlook and risks
- During the first half, Reliance acquired the Worthington Steel Vonore plant, National Specialty Alloys and McKey Perforating. Combined transaction value was $111.9m, including assumed and repaid debt; purchases were funded with revolver borrowings. A July 6 acquisition of substantially all Airport Metals (Australia) assets was disclosed as a subsequent event; terms were not disclosed.
- Management budgeted approximately $250m of 2012 capital expenditures but expected spending to finish below budget, without curtailing growth initiatives. It expected to continue acquisitions and other growth activity, funded near term by operating cash and revolver borrowings. No formal earnings or revenue guidance was provided.
- The board declared a Q3 2012 dividend of $0.25 per share, up from $0.15. The company paid $22.5m in dividends in the first half.
- Risks include metal-price and demand fluctuations, competition, interest rates, foreign exchange, and execution of acquisitions. Goodwill was $1.28bn and net intangible assets $915.6m; management reported no impairment indicators at June 30, but impairment estimates depend on assumptions about demand, commodity prices and growth. Environmental remediation at former EMJ manufacturing sites could involve significant costs; insurance was expected to cover most costs, and no material adverse impact was anticipated.
- Management reported no material change in previously disclosed risk factors or market-risk exposures. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether volume gains and same-store demand continue, particularly as same-store selling prices declined in Q2.
- How working-capital needs, capital spending and further acquisitions affect operating cash flow, revolver usage and leverage.
- Whether the LIFO reserve remains unchanged as management estimated, and how commodity-cost movements affect margins.
- Acquired-business contributions, integration performance and final purchase-price allocations; also the financial impact of the Airport Metals acquisition.
- Progress toward the November 2012 goodwill impairment review and the status of environmental remediation and insurance coverage.