Reliance, Inc. (Reliance Steel & Aluminum Co.) - 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Reliance Steel & Aluminum Co. for the period ended March 31, 1999. The company operates as a metals service center and fabrication firm. As of April 30, 1999, there were 18,470,160 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Net Sales | $371,884,000 | $315,468,000 |
| Gross Profit | $93,395,000 (25.1% margin) | $73,746,000 (23.4% margin) |
| Net Income | $14,057,000 | $11,759,000 |
| Earnings Per Share (Diluted) | $0.76 | $0.62 |
| Cash from Operating Activities | $36,237,000 | $1,112,000 |
| Working Capital | $296,879,000 | $291,170,000 (Dec 31, 1998) |
| Total Debt (Long-term + Current) | $378,350,000 | $343,350,000 (Dec 31, 1998) |
| Cash and Equivalents | $2,993,000 | $6,496,000 (Dec 31, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.9% year-over-year, driven by a 52.8% increase in tons sold. This volume growth was primarily due to the inclusion of acquisitions (Phoenix Metals, Durrett, Chatham, Lusk, American Metals, Steel Bar, Engbar, and Liebovich Bros.).
- Pricing Pressure: Average sales price per ton decreased 22.9% due to lower material costs and a shift in product mix toward lower-priced carbon steel products from recent acquisitions.
- Profitability: Gross profit margin improved to 25.1% from 23.4%, aided by lower material costs and inventory turnover. Operating income rose to $26,549,000 from $21,942,000.
- One-Time Gain: Net income included a non-taxable, one-time gain of $2,341,000 from life insurance proceeds related to the death of a former executive (SERP benefit).
- Acquisition Activity: The company acquired Liebovich Bros., Inc. (LBI) on March 1, 1999, for approximately $60,000,000 in cash. Total acquisition spending in the quarter was $70,508,000.
- Debt Levels: Long-term debt increased to $378,250,000 (excluding current maturities) from $343,250,000 at year-end 1998, reflecting borrowings used to fund acquisitions.
Guidance, Outlook, and Risks
- Liquidity: Management anticipates that funds from operations and the $200,000,000 revolving credit facility will be sufficient to meet working capital needs. No material capital expenditure commitments exist beyond the $4,926,000 spent in the quarter.
- Stock Repurchase: The company has a plan to repurchase up to 4,000,000 shares. As of March 31, 1999, 1,781,550 shares had been repurchased. No shares were repurchased in Q1 1999.
- Year 2000 Compliance: The company estimates total Y2K costs at approximately $1.5 million. Management does not anticipate a material impact on operations or cash flows, as systems are largely compliant or being converted.
- Seasonality: Operations generally do not show material seasonal trends, though November and December are traditionally less profitable due to holiday closures and reduced working days.
- LIFO Impact: The company uses LIFO inventory valuation. In periods of decreasing prices (as experienced in 1999), LIFO results in higher reported income than FIFO. FIFO operating income was $24,549,000 compared to LIFO operating income of $26,549,000.
Investor Verification Checklist
- Verify the sustainability of the 25.1% gross margin given the significant decrease in average selling prices per ton.
- Confirm the integration progress and financial performance of the Liebovich Bros. (LBI) acquisition, which closed late in the quarter.
- Assess the impact of the $2,341,000 non-recurring SERP gain on the reported EPS of $0.76.
- Monitor the utilization of the $200,000,000 revolving credit facility, which increased from $50,000,000 to $85,000,000 during the quarter.
- Review the status of Year 2000 software conversions for recently acquired subsidiaries not yet on the primary system.