Reliance Steel & Aluminum Co. — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013. Reliance distributes and processes metals. Comparisons are significantly affected by the April 2013 Metals USA acquisition, which added 44 service centers and contributed $454.5 million of Q1 2014 sales; Haskins Steel contributed $8.0 million.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Net sales | $2,553.0 million | $2,025.3 million | +26.1%; same-store sales +3.2% |
| Gross profit / margin | $647.2 million / 25.4% | $528.8 million / 26.1% | Margin down 0.7 percentage points |
| Operating income / margin | $154.3 million / 6.0% | $130.0 million / 6.4% | Operating income +18.7% |
| Net income attributable to Reliance | $87.2 million | $83.7 million | +4.2% |
| Diluted EPS | $1.11 | $1.09 | +1.8% |
| Operating cash flow | $68.8 million | $72.2 million | Lower by $3.4 million |
| Capital expenditures | $28.9 million | $26.8 million | Majority for growth initiatives |
Average selling price per ton fell 8.7% overall and 4.4% on a same-store basis, while same-store tons sold rose 8.4%. Management reported a competitive, volatile pricing environment; the gross margin remained within its stated historical range of 25%–27%. Q1 2014 included a $5.0 million LIFO expense, compared with a $5.0 million LIFO benefit in Q1 2013. The effective tax rate rose to 34.5% from 29.5%; the prior-year rate benefited from settlement of certain tax matters. Interest expense increased to $20.2 million from $13.1 million, principally reflecting debt used to fund Metals USA.
Financial position and liquidity
At March 31, 2014, cash was $113.6 million, current assets $3,025.1 million and current liabilities $746.2 million. Total debt was $2.131 billion, including $505.0 million outstanding on the $1.5 billion revolving facility; long-term debt was $2.091 billion. Net debt-to-capital was 33.8%, down from 34.3% at year-end 2013. The company reported compliance with debt covenants. Its revolving facility had a 2018 maturity; $567.1 million of debt obligations were due before that facility expires. A $39.2 million lump-sum payment on assumed mortgages is due in October 2016. Operating cash flow was affected by working-capital investment, including increases in receivables and inventory.
Changes, outlook, risks and unusual items
- Sales and tons grew substantially, mainly because of Metals USA. Same-store tons outpaced the industry comparison cited by management (8.4% versus 2.5%).
- Management said demand and pricing improved sequentially during the quarter, described the U.S. recovery outlook as cautiously optimistic, and expected modest improvement in energy markets and continued recovery in non-residential construction. It cited potential earnings capacity but provided no quantified earnings guidance.
- On April 29, 2014, after quarter-end, a judgment was entered jointly and severally against Reliance, Chapel Steel and four co-defendants for $156 million, representing treble damages on a $52 million jury verdict in an antitrust case. Reliance disputes the judgment and plans to pursue available remedies. It estimated its potential loss at $10–$39 million, accrued the $10 million minimum, and warned the ultimate obligation could differ materially.
- Management cited acquisition-related expenses and $10.3 million of antitrust litigation charges and accruals as factors affecting expenses. Excluding litigation and Metals USA transaction costs, management said operating income increased 23.5%.
- Environmental remediation obligations relate to former operations; management expects insurance to cover the majority of costs and does not expect a material adverse effect. The filing reported no material changes to previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- How much of sales, earnings and cash generation is attributable to acquired businesses versus same-store growth.
- Whether metals pricing, product mix and LIFO inventory adjustments support or pressure gross margins in subsequent periods.
- The status of the antitrust appeal or settlement, the estimated ultimate exposure, and related accruals.
- Working-capital trends, debt maturities and refinancing needs, including the October 2016 mortgage balloon payment, and continued covenant compliance.
- Whether management’s demand and pricing expectations materialize; the filing cautions that interim results are not necessarily indicative of full-year results.