Reliance Steel & Aluminum Co. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as Reliance Steel & Aluminum Co. Financial statements are unaudited.
Financial performance
- Q2 revenue: $2.050 billion, up 26.5% year over year; six-month revenue was $3.962 billion, up 28.9%.
- Q2 profit: Operating income was $165.6 million versus $114.6 million; net income attributable to Reliance was $98.7 million versus $61.5 million. Diluted EPS was $1.31 versus $0.83.
- Six-month profit: Operating income was $320.4 million versus $194.4 million; net income attributable to Reliance was $191.0 million versus $106.2 million. Diluted EPS was $2.54 versus $1.43.
- Margins: Q2 gross profit margin, a company-presented non-GAAP measure excluding related depreciation and amortization, was 24.9% versus 25.7%; operating margin improved to 8.1% from 7.1%. For six months, gross margin was 25.7% versus 25.9%, while operating margin rose to 8.1% from 6.3%.
- Cash flow: Six-month operating cash flow was negative $85.5 million versus negative $35.5 million. Capital expenditures were $66.3 million versus $39.4 million. Financing provided $159.9 million, and cash increased by $19.1 million to $92.0 million.
- Balance sheet and liquidity: At June 30, cash was $92.0 million, current assets $2.257 billion, and current liabilities $702.6 million. Total debt was approximately $1.114 billion, versus $943.1 million at year-end; long-term debt was $1.013 billion. Net debt-to-total capital was 25.2%, up from 23.5% at year-end.
Changes and drivers
- Sales growth reflected higher shipment volumes and selling prices. Q2 tons sold increased 9.6% and average selling price per ton rose 15.8%; six-month increases were 10.9% and 16.6%, respectively.
- Management cited better activity in energy, oil and gas, aerospace, farm and heavy equipment, mining, manufacturing, and semiconductor/electronics. Non-residential construction remained the weakest major market, though some areas showed improvement.
- Q2 gross margin declined as mill price announcements softened, creating pressure to reduce selling prices before lower-cost inventory was received. The LIFO expense was $25 million in Q2 and $45 million for the six months, compared with $10 million and $15 million, respectively, in 2010.
- SG&A rose in dollars but fell as a percentage of sales, to 15.3% in Q2 from 16.8%; management attributed the increase in expenses mainly to acquired businesses, variable compensation, and higher warehouse, delivery, and fuel costs.
- Receivables and inventory increased with higher business levels and metal prices, contributing to higher operating cash use. Accounts receivable rose to $958.1 million and inventory to $1.160 billion from year-end levels of $697.0 million and $860.2 million.
Outlook, financing, and risks
- Management estimated full-year 2011 LIFO expense of $90 million and budgeted approximately $200 million of capital expenditures. It gave no specific earnings or revenue guidance.
- On July 26, 2011, the company increased its revolving credit facility from $1.1 billion to $1.5 billion, extended maturity to July 26, 2016, and obtained more favorable pricing. The company reported covenant compliance at June 30: interest coverage of about 8.0x versus a 3.0x minimum, and leverage of 27.7% versus a 60% maximum.
- On August 1, 2011, after quarter-end, the company acquired Continental Alloys & Services and affiliates for approximately $415 million, net of cash acquired and subject to adjustments, funded with revolving-credit borrowings. The acquired businesses reported unaudited six-month sales of about $196 million; the acquisition did not affect June 30 results.
- EMJ environmental remediation obligations could involve significant cleanup costs, but the company expects insurance to cover most costs and does not expect a material adverse effect. Management reported no indications of impairment as of June 30, while noting that impairment estimates depend on assumptions about demand, commodity prices, and growth.
- Management reported no material change in market-risk exposures or previously disclosed risk factors. Risks include interest rates, economic conditions, competition, foreign exchange, metal prices, demand, and availability. Metal-price movements can affect margins; some customer markets are seasonal.
Important facts for investors to verify
- Whether shipment volumes, pricing, and end-market demand remain strong, especially given continued weakness in non-residential construction.
- Whether margin pressure and the estimated $90 million full-year LIFO charge develop as management expects.
- Working-capital needs, operating cash flow, and debt levels following the inventory build and Continental acquisition.
- The acquisition’s final purchase price, financing impact, and contribution to results after closing.
- Progress on the planned capital spending and the company’s ability to maintain covenant headroom and liquidity.