Business context and reporting period
Reliance Steel & Aluminum Co. filed this Form 10-K for the fiscal year ended December 31, 2010. Although the request identifies 2010 Q4, the filing reports full-year results; selected fourth-quarter figures are included below. Reliance is a metals service-center operator with more than 200 locations, distributing and processing over 100,000 metal products for more than 125,000 customers.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $6.313 billion | $5.318 billion | +18.7% |
| Gross profit / margin | $1.585 billion / 25.1% | $1.400 billion / 26.3% | Profit +13.2%; margin -1.2 percentage points |
| Operating income / margin | $360.7 million / 5.7% | $250.4 million / 4.7% | Income +44.1% |
| Net income attributable to Reliance | $194.4 million | $148.2 million | +31.2% |
| Diluted EPS | $2.61 | $2.01 | +29.9% |
| Cash from operations | $214.1 million | $943.0 million | Down $728.9 million |
| Capital expenditures | $111.4 million | $69.9 million | Up $41.5 million |
Cash and cash equivalents were $72.9 million at year-end; working capital was $1.192 billion. Total debt was approximately $943.1 million, including $195.0 million drawn under the $1.1 billion revolving facility. The company reported a 23.5% net-debt-to-total-capital ratio and compliance with debt covenants. The interest-coverage ratio was 5.8 times against a 3.0-times minimum; the covenant leverage ratio was 25.9% against a 60% maximum.
Fourth-quarter 2010 net sales were $1.584 billion, versus $1.273 billion in Q4 2009. Net income attributable to Reliance was $39.5 million versus $92.1 million; diluted EPS was $0.53 versus $1.25. The filing does not clearly attribute this year-over-year quarterly earnings decline to a single cause.
Material changes versus prior periods
- Sales recovered from the recession-affected 2009 level as average selling price per ton rose 11.7% and tons sold rose 5.9%. Same-store sales increased 18.3%.
- Operating performance improved, but gross margin fell to 25.1% from 26.3%. Management highlighted a $340 million adverse year-over-year swing in the LIFO adjustment: a $34.8 million expense in 2010 versus $305.0 million of income in 2009. This materially affected comparability.
- Operating cash flow declined sharply as receivables and inventory grew with higher demand and metal prices. Receivables increased $146.7 million and FIFO inventory increased $156.6 million from year-end 2009; inventory turns improved to 4.8 times from 3.7 times.
- Reliance acquired Diamond Manufacturing and Lampros Steel in 2010, with a combined transaction value of about $123 million, and spent $111.4 million on capital expenditures. Debt was broadly stable year over year.
Outlook, risks, contingencies and unusual items
Management expected slow, steady demand improvement through 2011, average selling prices at or above 2010 levels, and gross margins of 25%–27% if demand improved and metal-price fluctuations remained moderate. It anticipated possible downward pricing pressure from the second quarter absent stronger demand and said results could remain below the company’s estimated earnings potential, particularly while non-residential construction remained weak. The 2011 capital expenditure budget was approximately $200 million; management also expected to pursue acquisitions and internal growth.
- Key risks include cyclical and still-low customer demand, especially in non-residential construction; volatile metal prices and difficulty passing cost changes through to customers; competition and potential inventory-margin pressure; customer credit losses; supplier availability; and variable-rate borrowing costs.
- Debt obligations included $86.7 million due before the revolving facility’s November 2012 maturity. The company had $600 million of public notes due in 2016 and 2036 and $135 million of private notes maturing from 2011 to 2013. Management expected operating cash flow and revolver availability to fund obligations and planned investment.
- Environmental remediation related to former EMJ operations could involve significant cleanup costs, although insurance was expected to cover most costs; management did not expect a material financial impact. Routine litigation was not expected to have a material adverse effect. Tax audits could result in additional taxes, interest or penalties; $15.4 million of unrecognized tax benefits was reported at year-end.
- Goodwill was $1.110 billion, about 24% of total assets; no impairment was recorded for 2008–2010. Adverse changes in markets or assumptions could lead to a material impairment charge. The filing reported no material off-balance-sheet arrangements and $42.6 million of standby letters of credit.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether 2011 demand and pricing assumptions, particularly for non-residential construction and carbon steel, were realized and how they affected margins.
- How much of reported earnings and margin changes reflected underlying operations versus LIFO accounting effects.
- Whether working-capital investment converts back into operating cash flow while Reliance funds its $200 million capital budget and acquisition plans.
- Debt refinancing and repayment capacity ahead of the 2012 revolver maturity and near-term private-note maturities, including covenant headroom.
- Integration and performance of the 2010 acquisitions, and the ultimate costs and insurance recoveries for environmental remediation and tax matters.