Business context and reporting period
Reliance Steel & Aluminum Co. filed this Form 10-K for the fiscal year ended December 31, 2017. The company operates more than 300 metals service centers in the U.S. and 13 other countries, distributing and processing metals for more than 125,000 customers. It reported one operating and reportable segment: metals service centers. The filing also provides unaudited fourth-quarter results.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $9,721.0 million | $8,613.4 million |
| Gross profit | $2,787.8 million | $2,590.3 million |
| Gross margin | 28.7% | 30.1% |
| Operating income / margin | $662.4 million / 6.8% | $517.8 million / 6.0% |
| Net income attributable to Reliance | $613.4 million | $304.3 million |
| Diluted EPS | $8.34 | $4.16 |
| Cash from operations | $399.0 million | $626.5 million |
| Capital expenditures | $161.6 million | $154.9 million |
| Working capital at year-end | $2,347.6 million | $2,032.5 million |
| Total debt at year-end | $1,914.5 million | $1,945.0 million |
Gross profit and gross margin are company-presented non-GAAP measures that exclude depreciation and amortization associated with sales. Year-end cash was $154.4 million. Reliance had $908.7 million available on its revolving credit facility and a net debt-to-total capital ratio of 27.2%, down from 30.3%. The 2017 dividend was $1.80 per share; the board raised the quarterly dividend to $0.50 in February 2018.
Fourth-quarter 2017 net sales were $2,376.4 million and net income attributable to Reliance was $301.4 million, or diluted EPS of $4.09. Fourth-quarter 2016 results were $2,061.6 million, $61.7 million and $0.84, respectively.
Material changes versus the prior comparable period
- Full-year sales increased 12.9%; same-store tons sold rose 3.6% and same-store average selling price per ton increased 9.1%.
- Gross profit reached a company record and increased 7.6%, while gross margin declined from 30.1% to 28.7%. Management cited more competitive pricing in 2017 and a favorable rising-price inventory effect in 2016.
- Operating income increased 27.9%, supported by higher sales and substantially lower impairment charges ($4.2 million versus $52.4 million).
- Reported net income more than doubled, but included a provisional $207.3 million net tax benefit from 2017 tax reform. Excluding tax reform, the company reported diluted EPS of $5.52.
- Operating cash flow fell to $399.0 million, primarily because higher metal prices and shipments increased working-capital needs. Receivables and inventory used $306.3 million of cash combined.
- Interest expense declined to $73.9 million from $84.6 million, partly because Reliance repaid $350 million of 6.20% notes in 2016 and replaced that funding with lower-rate credit borrowings.
Outlook, commentary, risks and unusual items
- Management cited improved demand across most end markets, including energy, while noting energy demand remained well below its 2014 peak. Aerospace and automotive performed well; heavy-industry demand remained weak.
- Management set a 2018 capital expenditure budget of approximately $225 million, including about $40 million of projects carried forward from 2017. Estimated annual maintenance capital expenditures were $80–$90 million. The company said it would reassess growth projects against economic conditions.
- Tax reform lowered the U.S. federal statutory rate to 21% beginning in 2018. The 2017 tax benefit was provisional; the company had not yet estimated the effect of GILTI and expected to refine tax amounts during 2018.
- Key exposures include metal-price volatility, inventory valuation and LIFO effects, cyclical end-market demand, competitive pressure and the ability to pass cost changes to customers. Reliance does not hedge metal-price or interest-rate risk with derivatives.
- Variable-rate debt was approximately $1.16 billion; a 100-basis-point rate increase would add about $11.6 million to annual interest expense. The revolving facility expires in 2021; debt securities mature in 2023 and 2036. The company reported compliance with its financial covenants at year-end.
- Goodwill was $1.84 billion and intangible assets were $1.11 billion at year-end. No goodwill impairment was recorded in 2017; impairment assessments depend on estimates of future cash flows and market conditions.
- The company acquired Ferguson Perforating in October 2017. It also disclosed an environmental remediation matter associated with former EMJ operations; insurance was expected to cover most related costs. Routine litigation was not expected to have a material effect.
Most important facts for investors to verify
- How much of reported earnings growth reflects sustainable operating improvement versus the one-time tax benefit, and how the provisional tax accounting changes in 2018.
- Whether higher working-capital investment converts into cash as metal prices and demand change, including the effects of LIFO accounting.
- Whether gross margins hold near management’s 27%–29% target amid pricing competition and potential trade-policy changes.
- Whether planned growth capital expenditures earn adequate returns while Reliance services debt maturities and manages floating-rate exposure.
- Whether energy-market recovery and assumptions supporting goodwill and intangible-asset valuations remain intact.