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 June 30, 1997. The company operates as a metals service center and manufacturer (Valex Corp.). The reporting period includes the impact of a three-for-two stock split declared in May 1997 and significant acquisitions completed in April 1997.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 1997 | Six Months Ended June 30, 1997 |
|---|---|---|
| Net Sales | $243,824 | $445,415 |
| Net Income | $8,374 | $15,298 |
| Earnings Per Share | $0.55 | $0.99 |
| Gross Profit Margin | 22.9% | 22.9% |
| Operating Income | $13,748 | $25,572 |
| Working Capital | $170,217 (as of June 30, 1997) | N/A |
| Long-Term Debt | $177,450 (as of June 30, 1997) | N/A |
| Cash and Equivalents | $1,363 (as of June 30, 1997) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 48.1% for the quarter and 38.2% for the six-month period compared to 1996. This growth was driven primarily by the inclusion of sales from four acquisitions: CCC Steel, Siskin Steel, AMI Metals, and Amalco Metals.
- Volume vs. Price: While tons sold increased significantly (60.6% for the quarter), average sales price per ton decreased slightly (1.7% for the quarter) due to product mix changes.
- Profitability: Net income rose 7.8% for the quarter and declined slightly (2.0%) for the six-month period. Gross profit margins decreased from 23.8% to 22.9% (quarterly) due to the LIFO accounting effect and declining margins in the Valex division.
- Expenses: Interest expense increased significantly ($1,983 for the quarter) due to borrowings used to fund acquisitions. Depreciation and amortization rose 54.0% due to new assets and goodwill amortization.
- Cash Flow: Net cash provided by operating activities decreased to $3.7 million for the six months ended June 30, 1997, from $21.2 million in the prior year, primarily due to a $22.2 million increase in accounts receivable.
Guidance, Outlook, and Risks
- Acquisitions: The company acquired AMI Metals ($38.5M) and Amalco Metals in April 1997, funded by a revolving line of credit. A new facility combining operations is scheduled for completion in early 1998.
- Valex Outlook: Sales for Valex Corp. (semiconductor manufacturing) declined due to a slowdown in construction activities. Management expects this slowdown to continue through the remainder of 1997, though slight improvements were noted in the second half.
- Liquidity: The revolving line of credit limit was increased to $125 million in March 1997. Management believes internal funds and credit facilities are sufficient to meet working capital and expansion needs.
- Accounting Changes: The company is preparing to adopt FAS 128 (Earnings per Share) by December 31, 1997, which will require restating prior periods.
- Risks: The company notes that results are not necessarily indicative of annual results due to potential seasonal fluctuations and the impact of LIFO accounting during periods of rising raw material costs.
Investor Verification Checklist
- Verify the sustainability of the 48% sales growth once the one-time impact of the April 1997 acquisitions is normalized.
- Monitor the Valex division's performance given the stated slowdown in the semiconductor construction industry.
- Review the impact of the LIFO reserve increase ($2.2M for the quarter) on reported earnings versus FIFO earnings.
- Assess the company's ability to service increased debt levels ($177.5M total long-term debt) given the rise in interest expenses.
- Confirm the timeline and cost of the new Union City facility intended to consolidate AMI and Amalco operations.