Reliance Steel & Aluminum Co. — 2014 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. Reliance distributes and processes metals through more than 300 service-center locations, serving over 125,000 customers. It reported one segment: metals service centers.
Key financial results
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $10,451.6 million | $9,223.8 million | +13.3% |
| Gross profit / margin | $2,621.0 million / 25.1% | $2,397.6 million / 26.0% | Margin down 0.9 percentage points |
| Operating income / margin | $617.4 million / 5.9% | $551.9 million / 6.0% | Income +11.9% |
| Net income attributable to Reliance | $371.5 million | $321.6 million | +15.5% |
| Diluted EPS | $4.73 | $4.14 | +14.3% |
| Cash from operations | $356.0 million | $633.3 million | Down $277.3 million |
| Capital expenditures | $190.4 million | $168.0 million | +$22.4 million |
Gross profit and gross margin are company-presented non-GAAP measures that exclude associated depreciation and amortization. Same-store sales grew 6.7%, same-store tons sold rose 6.1%, and same-store average selling price increased 0.6%. Consolidated growth also reflected acquisitions, notably Metals USA, which contributed $1.78 billion of 2014 sales.
Fourth-quarter 2014 sales were $2,576.7 million, versus $2,306.7 million a year earlier. Net income attributable to Reliance was $92.3 million ($1.18 diluted EPS), compared with $61.8 million ($0.79 diluted EPS) in fourth-quarter 2013.
Balance sheet, debt and liquidity
- At year-end, cash was $106.2 million, working capital $2,458.3 million, total assets $7,836.6 million, and Reliance shareholders’ equity $4,099.0 million.
- Total debt was $2,319.1 million, up from $2,112.3 million in 2013. Net debt-to-total capital was 35.0%, versus 34.3%.
- The $1.5 billion revolving facility had $675.0 million drawn and $765.8 million available; $59.2 million of letters of credit were also outstanding. The company reported compliance with debt covenants.
- Variable-rate debt was approximately $1.18 billion. Management estimated a 100-basis-point rate increase would add about $11.8 million in annual interest expense.
- Current ratio is not stated in the filing text as a headline metric. The balance sheet reports current assets of $3,121.1 million and current liabilities of $662.8 million.
Material changes versus prior year
- Sales rose with improved demand and acquisitions, while gross margin eased from 26.0% to 25.1%. Management attributed margin pressure to high imports, competitive pricing, and metal-price volatility.
- Average selling prices increased slightly for the full year but declined for many steel products in the fourth quarter as imports rose, the U.S. dollar strengthened, and raw-material costs—particularly scrap—fell.
- Operating cash flow fell as stronger business activity and higher metal prices required more cash investment in receivables and inventory. Year-end inventory was $1,752.1 million, up from $1,540.0 million.
- Reliance completed three acquisitions in 2014, including All Metal Services, Northern Illinois Steel Supply, and Fox Metals and Alloys; it also acquired control of Acero Prime. Acquisition spending, net of cash acquired, was $208.2 million.
Outlook, risks and unusual items
- Management expected moderate overall demand improvement in 2015, excluding energy, and anticipated strong operating cash flow. It forecast continued near-term steel-price declines and said these would pressure first-quarter 2015 margins and earnings. No numerical earnings or sales guidance was provided.
- Management budgeted approximately $200 million for 2015 capital expenditures, including about $80 million estimated maintenance spending, and cited plans to continue acquisitions, internal investment, dividends, and opportunistic buybacks.
- Energy represented approximately 8%–10% of sales. The late-2014 oil-price decline had weakened energy-market activity; management expected near-term negative effects but did not specify their duration or magnitude.
- A Texas antitrust case was settled for $23.0 million in October 2014 after a judgment that had been reduced to $153.5 million. The company recorded total 2014 charges of $23.2 million related to the matter; Reliance and its subsidiary were released from liability under the judgment.
- Other notable items included an $11.4 million gain from acquiring control of Acero Prime in stages and a combined $24.1 million pre-tax benefit cited by management from gains on non-core real estate sales and incremental joint-venture ownership. The filing also reports a $1.1 million pre-tax loss on the sale of Metals USA’s non-core roofing business.
- Key risks include metal-price and inventory exposure (including LIFO effects), cyclical demand, imports and competition, energy-market weakness, acquisition integration and goodwill impairment, leverage and floating-rate interest costs, international and currency exposure, and environmental, regulatory, cybersecurity, and labor risks. Environmental remediation relating to former EMJ operations is expected to be largely covered by insurance, according to the filing.
Most important facts for investors to verify
- Whether steel prices and import competition continue to pressure selling prices, gross margins, and inventory values.
- Whether working-capital needs moderate and operating cash flow recovers after the 2014 decline.
- Debt repayment and refinancing capacity, especially the $350 million notes due in 2016 and the substantial 2018 facility and term-loan maturities; assess variable-rate exposure and covenant headroom.
- Performance and integration of recent acquisitions, and the sensitivity of goodwill and intangible assets to weaker end markets.
- Actual energy-market impact, environmental-remediation costs and insurance recoveries, and execution of the 2015 capital-spending and cash-return plans.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2014.