RS

Business Context and Reporting Period

Company: Reliance Steel & Aluminum Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Reliance operates as a metals service center, processing and distributing carbon steel, stainless steel, aluminum, and red metal products. The company reported a large accelerated filer status with 72,913,036 shares of common stock outstanding as of April 30, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.6% year-over-year to $1.91 billion. This growth was driven by a 4.6% increase in average selling price per ton, which offset a 0.7% decrease in tons sold. Same-store sales increased 0.6%.
• Profitability: While gross profit increased 4.2%, operating profit declined 4.1% to $192.4 million. The operating margin compressed from 10.9% to 10.1% primarily due to higher Selling, General, and Administrative (S,G&A) expenses, which rose 10.2% to $281.7 million (14.8% of sales vs. 13.9% prior year).
• Cost Drivers: S,G&A increases were attributed to higher fuel, energy, and personnel costs. Depreciation expense rose 12.5% due to assets from 2007 acquisitions. LIFO expense was $17.5 million in Q1 2008 compared to $18.75 million in Q1 2007.
• Interest Expense: Decreased 17.4% to $16.6 million due to lower borrowing rates and reduced outstanding balances.
• Liquidity: Cash and cash equivalents increased significantly to $96.7 million from $28.6 million. Working capital improved to $1.17 billion, driven by increases in accounts receivable and inventory to meet demand and price increases.

Guidance, Outlook, and Risks

• Outlook: Management expects demand to potentially decline further in 2008 but does not anticipate sudden, significant volume changes. Full-year 2008 LIFO expense is estimated at $70 million due to rising carbon steel costs.
• Capital Allocation: The company repurchased 2.44 million shares of common stock for $114.8 million in Q1 2008. The Board declared a 25% dividend increase to $0.10 per share. Capital expenditures for Q1 were $36.0 million, with a full-year budget of approximately $210 million.
• Acquisitions:
  • Dynamic Metals International LLC: Acquired effective April 1, 2008 (subsequent event) to expand specialty product offerings in the Northeast.
  • Encore Coils Sale: Sold certain assets of the Encore Coils division in January 2008 for $16.1 million; the loss was not material.
• Risks:
  • Market Risk: Exposure to fluctuations in interest rates, foreign currency exchange rates, and metals pricing/availability.
  • Competition: Markets remain very competitive, though pricing power for carbon steel has improved margins.
  • Seasonality: Revenues in July, November, and December are traditionally lower due to reduced working days.

Investor Verification Checklist

• LIFO Impact: Verify the accuracy of the $70 million full-year LIFO expense estimate given the volatility in carbon steel prices.
• Working Capital Efficiency: Monitor Days Sales Outstanding (currently ~40 days) and inventory turnover (4.6x) to ensure they remain stable as inventory levels rise with higher metal costs.
• Debt Covenants: Confirm continued compliance with the $1.1 billion syndicated credit facility covenants (minimum net worth, interest coverage, maximum leverage) as debt levels remain elevated.
• Acquisition Integration: Assess the financial contribution of 2007 acquisitions (Metalweb, Clayton, Encore, Crest, Industrial Metals) and the new Dynamic Metals acquisition to future revenue growth.
• Share Repurchase Authorization: Note that approximately 7.9 million shares remain authorized for repurchase under the current plan.