Reliance Steel & Aluminum Co. — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same 2010 periods. Reliance distributes and processes metals. Effective August 1, it acquired Continental Alloys & Services, a global supplier of high-end steel and alloy products; reported purchase-price allocation remains preliminary.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,138.6 million | $1,653.8 million | $6,100.8 million | $4,728.5 million |
| Operating income | $140.1 million | $88.2 million | $460.5 million | $282.6 million |
| Net income attributable to Reliance | $84.9 million | $48.7 million | $275.9 million | $154.9 million |
| Diluted earnings per share | $1.13 | $0.65 | $3.68 | $2.08 |
| Gross profit margin | 23.1% | 24.0% | 24.8% | 25.2% |
| Operating margin | 6.6% | 5.3% | 7.5% | 6.0% |
- Q3 sales rose 29.3% and nine-month sales rose 29.0%. Same-store sales increased 21.7% and 24.9%, respectively. Higher volume and selling prices, along with acquisitions, contributed to growth.
- Q3 tons sold increased 13.0% and average selling price per ton rose 15.4%; nine-month increases were 11.6% and 16.3%. The company said September shipments per day reached their highest level since November 2008.
- Profit attributable to Reliance rose 74.3% in Q3 and 78.1% year to date. Higher gross-profit dollars and operating expense growth below sales growth supported operating income. Gross margin nevertheless narrowed, with management citing mill price decreases and the lag before lower-cost inventory reaches cost of sales.
- Nine-month operating cash flow was $17.3 million, versus $47.7 million in 2010. Increased working capital absorbed cash: accounts receivable and FIFO inventory rose $270.7 million and $362.1 million from year-end, partly offset by higher payables and accrued expenses. Capital expenditures were $112.7 million; investing cash use was $406.5 million, including $306.5 million for an acquisition.
Financial position and liquidity
- At September 30, cash was $91.1 million, current assets $2.43 billion, current liabilities $644.5 million, and total assets $5.73 billion. Inventory was $1.28 billion and accounts receivable $1.02 billion.
- Total debt was approximately $1.48 billion, up from $941.3 million at December 31, 2010; net debt-to-total capital increased to 31.0% from 23.5%. The company reported $790 million drawn on its $1.5 billion revolving facility.
- The revolving facility was amended in July: capacity increased from $1.1 billion to $1.5 billion and maturity extended to July 26, 2016. Revolver borrowings carried a weighted-average rate of 1.74% at quarter-end. The company reported $41.3 million of letters of credit outstanding.
- Debt covenant measures remained within limits: interest coverage was approximately 8.8x versus a 3.0x minimum; leverage was 33.0% versus a 60% maximum. Reliance reported compliance with all covenants.
- Cash dividends paid in the first nine months totaled $26.9 million, or $0.36 per share. The board declared a $0.12-per-share fourth-quarter dividend.
Outlook, commentary, and risks
- Management described 2011 demand as improved across most markets. Energy, oil and gas, aerospace, farm and heavy equipment, mining, general manufacturing, and semiconductor/electronics were among the strongest; non-residential construction remained the weakest major end market.
- Management estimated a full-year 2011 LIFO expense of $90 million, reflecting expected year-end inventory quantities and costs above 2010 levels. Nine-month LIFO expense was $67.5 million, compared with $24.8 million a year earlier.
- Capital expenditures were budgeted at approximately $200 million for 2011; management expected full-year spending below budget, while some growth projects would continue into 2012. The company expected adequate cash flow and revolver capacity for debt, working capital, capital spending, and growth, and anticipated continued acquisition and growth activity. No numerical earnings or revenue guidance was provided.
- Environmental remediation obligations relate to former EMJ manufacturing operations; insurance was expected to cover most costs, and the company did not expect a material adverse financial effect. Goodwill was $1.23 billion and net intangible assets $909.8 million; management reported no impairment indicators at quarter-end and planned its annual goodwill test for November 1, 2011.
- Management reported no material change in market-risk exposures or risk factors from the 2010 Form 10-K. It cautioned that actual results may differ from forward-looking statements; results for the interim period are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether volume, pricing, and stronger end-market demand persist, particularly given continued weakness in non-residential construction.
- How mill-price movements and inventory-cost timing affect gross margins and the estimated $90 million full-year LIFO expense.
- Continental’s integration, contribution to results, and final purchase-price allocation, including acquired goodwill and intangible values.
- Working-capital requirements, operating cash generation, capital expenditures, and debt levels as growth and acquisition activity continue.
- Assumptions underlying goodwill and intangible-asset recoverability, and the scope and cost of environmental remediation net of insurance.