Reliance Steel & Aluminum Co. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts in millions except per-share data.
Business context and financial performance
The metals distributor and processor reported lower sales amid substantially lower year-over-year metal prices and continued weakness in energy markets. Management highlighted stable demand across most other end markets, better second-quarter pricing, and improved gross margins through operating execution, inventory management, and value-added processing.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $2,203.9 | $2,423.7 | $4,366.6 | $5,038.1 |
| Gross profit / margin | $685.1 / 31.1% | $655.9 / 27.1% | $1,321.8 / 30.3% | $1,326.6 / 26.3% |
| Operating income / margin | $173.1 / 7.9% | $160.2 / 6.6% | $302.9 / 6.9% | $329.5 / 6.5% |
| Net income attributable to Reliance | $100.9 | $90.2 | $193.1 | $191.5 |
| Diluted EPS | $1.38 | $1.20 | $2.65 | $2.50 |
| Operating cash flow | Not presented quarterly | $205.2 | $463.9 |
Q2 sales declined 9.1%, while first-half sales fell 13.3%. Same-store tons sold were down 0.4% in Q2 and 2.1% for the half, but exceeded industry shipment trends cited by management. Average selling price per ton fell 10.1% in Q2 and 13.0% for the half. Q2 gross margin rose 400 basis points; first-half operating income declined 8.1% despite a higher operating margin. Gross profit and gross margin are non-GAAP measures as presented by the company, excluding related depreciation and amortization.
Liquidity, debt, and other key metrics
- At June 30, cash was $116.5; current assets were $2,853.8 and current liabilities $1,078.0.
- Total debt was $2,181.0, up from $1,942.1 at December 31, 2015. Net debt-to-total capital was 33.4%, versus 31.8% at year-end.
- The $1.5 billion revolving facility had $612.0 outstanding, $56.9 of letters of credit, and $831.1 available. The company reported compliance with material debt covenants.
- Capital expenditures were $71.7 for the first half. Acquisitions used $322.4 of cash; operating cash flow was $205.2, and cash increased $12.2 to $116.5.
- Inventory turns were 4.7 times for the first half; days sales outstanding were approximately 42.2 days.
Material changes, outlook, risks, and unusual items
- Reliance acquired Tubular Steel on January 1 and Best Manufacturing on April 1, 2016. The acquisitions contributed approximately $60.1 and $4.9 of reported sales, respectively, for the periods disclosed. Purchase price allocations remained preliminary.
- First-half operating cash flow was lower than the prior year, primarily because 2015 benefited from working-capital reductions as metal prices fell and inventory was reduced. First-half 2016 working capital use included increases in receivables and inventory.
- A resolution of a previously uncertain tax position reduced the six-month effective tax rate by 6.7 percentage points. Management estimated a full-year 2016 effective tax rate of approximately 28%; no earnings or sales guidance was provided.
- A $350.0 senior note tranche was due November 15, 2016. The company said it expected sufficient liquidity to meet debt obligations, including the notes, and stated that $510.2 of debt obligations came due before the revolving facility’s April 2018 expiration.
- After quarter-end, on July 1, the company repaid mortgage obligations without penalty using revolver borrowings. On July 20, the board declared a third-quarter dividend of $0.425 per share, a 6.3% increase from the second-quarter dividend.
- Management identified metal-price volatility, demand and availability, interest rates, foreign exchange, and economic conditions as market exposures. Energy demand remained weak; lower pricing, working-capital requirements, and potential impairment of goodwill or intangible assets are relevant risks. Environmental remediation costs could be significant, but existing insurance was expected to cover most remaining costs; the company did not expect a material adverse effect. Routine litigation was not expected to have a material effect.
- Goodwill was $1,830.9 and net intangible assets $1,205.3 at June 30. No goodwill impairment losses had been recorded. Management reported no material changes in risk factors and no significant changes in market-risk exposure since year-end.
Important facts for investors to verify
- Whether improved Q2 metal pricing and gross margins continued, and how pricing and energy-market weakness affected subsequent results.
- How the Tubular Steel and Best Manufacturing acquisitions performed, including final purchase price allocations and integration outcomes.
- Funding and repayment of the $350.0 notes due November 2016 and subsequent effects of mortgage repayment on revolver borrowings and total debt.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside capital spending, dividends, and any share repurchases.
- Assumptions supporting the approximately 28% full-year tax-rate estimate, and the carrying values of goodwill and intangible assets.