Reliance Steel & Aluminum Co. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone Q4 report; unaudited quarterly results are also summarized below. Unless noted, amounts are in U.S. dollars.
Business context
Reliance operates more than 220 metals service centers in North America and internationally, processing and distributing over 100,000 metal products to more than 125,000 customers. The business is diversified by product, customer and geography, but remains exposed to cyclical industrial demand and volatile metal prices. Non-residential construction is its largest end market, at about 30% of sales.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $8,134.7 million | $6,312.8 million | +28.9% |
| Gross profit | $1,986.0 million | $1,584.9 million | +25.3% |
| Gross margin | 24.4% | 25.1% | Down 0.7 percentage points |
| Operating income | $572.8 million | $360.7 million | +58.8% |
| Net income attributable to Reliance | $343.8 million | $194.4 million | +76.9% |
| Diluted EPS | $4.58 | $2.61 | +75.5% |
| Cash provided by operations | $234.8 million | $214.1 million | +$20.7 million |
Gross profit and gross margin are company-presented non-GAAP measures that exclude associated depreciation and amortization; comparability with other companies may be limited. FY2011 same-store tons sold rose 9.8%, while average selling price per ton rose 13.5%. S,G&A fell to 15.7% of sales from 17.5%, supporting operating-margin expansion to 7.0% from 5.7%. The 2011 effective tax rate was 31.7%, versus 33.3%.
Q4 unaudited snapshot: Net sales were $2,033.9 million versus $1,584.3 million in Q4 2010; gross profit was $475.0 million versus $393.8 million; net income attributable to Reliance was $67.9 million versus $39.5 million; diluted EPS was $0.91 versus $0.53. Quarterly gross profit is likewise the filing’s non-GAAP measure.
Liquidity, cash flow and debt
- Cash was $84.6 million; working capital was $1,698.3 million at year-end, compared with $1,192.3 million a year earlier.
- Total debt was approximately $1.33 billion, up from $943.1 million at year-end 2010. Net debt-to-total capital was 28.4%, versus 23.5%.
- The $1.5 billion revolving facility had $645.0 million drawn and matures in July 2016. The company reported covenant compliance; interest coverage was 9.5x against a 3.0x minimum, and its covenant leverage ratio was 30.3% against a 60% maximum.
- Operating cash flow was $234.8 million; capital expenditures were $156.4 million, and the Continental acquisition used $313.3 million, net of cash acquired and debt assumed. Increased receivables and inventory absorbed cash as sales, demand and metal prices rose.
- Scheduled debt maturities through July 2016 were reported at $87.8 million; the contractual-obligations table lists $995.0 million due in 2016, including the revolving facility balance assumed to remain outstanding through maturity.
Material changes and notable items
- FY2011 sales growth reflected higher volume, higher average selling prices and acquisitions. Same-store tons sold increased 9.8%; reported total tons sold increased 13.0%.
- Gross margin declined as metal prices became more volatile and generally weakened after early-year increases. The LIFO reserve charge was $85.3 million in 2011, compared with $34.8 million in 2010; the reserve reached $202.9 million at year-end.
- Reliance acquired Continental Alloys & Services effective August 1, 2011, adding energy-market exposure and international operations; its reported five-month sales were $204.8 million. A subsequent February 2012 acquisition, McKey Perforating, had unaudited 2011 sales of about $18 million.
- Goodwill was $1.24 billion and net intangible assets were $895.9 million at year-end. The company reported no goodwill impairment for 2009–2011.
- The board raised the regular quarterly dividend to $0.15 per share in February 2012, from $0.12; FY2011 dividends were $0.48 per share.
Outlook, risks and contingencies
Management expected gradual improvement in the U.S. business climate, continued metal-price volatility and improved FY2012 financial results versus FY2011. It cautioned that results could remain below the company’s perceived earnings potential until demand improves materially, particularly in non-residential construction. The FY2012 capital expenditure budget was approximately $250 million, including growth projects; management estimated maintenance capital spending at about $70 million and said spending could be scaled back if needed. The company also planned to pursue disciplined acquisitions and internal growth.
- Principal risks include cyclical end-market demand, inability to pass through metal-cost changes, inventory exposure during falling prices, competitive pressure and supplier availability.
- Debt increased to fund working capital, investment and acquisitions. The revolving facility bears variable-rate interest; management estimated that a 1% rate increase on $657.7 million of variable-rate debt would add about $6.6 million of annual pretax interest expense.
- Environmental remediation matters relate in part to former EMJ manufacturing operations; the company expected insurance to cover most related costs and did not expect a material adverse impact. Routine litigation was not expected to be material. Tax audits and $16.1 million of unrecognized tax benefits remain potential exposures.
- Goodwill and intangible-asset valuations depend on future cash-flow and market assumptions; a material impairment could result if conditions deteriorate. Foreign exchange transaction losses were $5.9 million in 2011.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2011.
Most important facts for investors to verify
- Whether volume growth and pricing support margins as metal prices fluctuate, and how the sizable 2011 LIFO charge affects comparisons.
- Whether operating cash generation can fund the planned $250 million FY2012 capital program, working-capital needs, dividends and acquisition activity.
- Debt trajectory, variable-rate exposure, 2016 maturity/refinancing needs and continued compliance with credit covenants.
- Continental’s post-acquisition performance and integration, and the economics of the McKey acquisition.
- Demand recovery in non-residential construction and the progress of environmental and tax matters.