Business Context and Reporting Period
Company: Reliance Steel & Aluminum Co. (Reliance)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Industry: Metals Service Centers (Distribution and processing of carbon steel, stainless steel, aluminum, brass, and copper).
Reliance operates a network of 72 processing and distribution facilities across 21 U.S. states and France. The company serves over 65,000 customers in manufacturing, construction, transportation, aerospace, and semiconductor industries. The 1999 fiscal year was characterized by aggressive expansion through acquisitions, entering the Midwest market, and navigating cyclical downturns in the aerospace sector offset by growth in semiconductor and construction sectors.
Key Financial Metrics (Year Ended Dec 31, 1999)
| Metric | 1999 | 1998 | Change |
|---|---|---|---|
| Net Sales | $1,511,065,000 | $1,352,807,000 | +11.7% |
| Gross Profit | $413,628,000 | $328,593,000 | +25.9% |
| Gross Margin | 27.4% | 24.3% | +3.1 pts |
| Income from Operations | $109,478,000 | $88,942,000 | +23.1% |
| Net Income | $57,610,000 | $47,675,000 | +20.8% |
| Diluted EPS | $2.07 | $1.68 | +23.2% |
| Working Capital | $273,040,000 | $289,147,000 | -5.6% |
| Total Assets | $900,005,000 | $841,395,000 | +7.0% |
| Long-Term Debt | $318,050,000 | $343,250,000 | -7.3% |
| Cash Flow from Operations | $131,355,000 | $30,935,000 | +324.6% |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 11.7% driven by a 35.1% increase in tons sold, partially offset by a 17.4% decrease in average selling price per ton due to lower raw material costs and a product mix shift toward lower-priced carbon steel.
- Margin Expansion: Gross margin improved to 27.4% from 24.3%. Management attributed this to raw material costs declining faster than selling prices for most of the year, and the ability to raise selling prices ahead of cost increases in the second half of 1999.
- Acquisition Impact: Four major acquisitions in 1999 (Liebovich, Allegheny, Arrow Metals, and Hagerty in early 2000) and seven in 1998 significantly contributed to volume and earnings. Liebovich provided entry into the Midwest market.
- Industry Mix Shift: Aerospace sales declined approximately 17% due to decreased buying patterns by major customers. This was offset by improvements in the semiconductor and construction industries.
- One-Time Gain: Net income included a non-taxable one-time gain of $2.34 million from life insurance proceeds related to the Supplemental Executive Retirement Plan (SERP).
Guidance, Outlook, and Risks
- Outlook: Management does not anticipate the same rate of growth in gross margins and net income in 2000 as seen in recent years due to increasing material costs. However, the company expects increased revenue and gross margin dollars on a consistent volume basis as higher metal costs are passed to customers.
- Acquisition Strategy: The company remains aggressive in acquisitions to diversify geographic and product exposure. The Hagerty acquisition (completed Feb 2000) was funded via the line of credit.
- Liquidity: The company maintains a $200 million syndicated credit facility (with $175 million available for acquisitions). As of Dec 31, 1999, $25 million was outstanding. Management believes internal funds and credit facilities are sufficient for working capital and future acquisitions.
- Risks:
- Cyclicality: Exposure to cyclical industries (aerospace, semiconductor, construction) subject to economic downturns.
- Commodity Prices: Fluctuations in raw metal prices, though the company generally passes costs through to customers.
- Leverage: Increased long-term debt from acquisitions increases financial risk.
- Goodwill: Goodwill represents 24% of total assets ($215.2 million). Impairment could materially affect future results if operating income declines.
Investor Verification Checklist
- Acquisition Integration: Verify the performance of 1998 and 1999 acquisitions (specifically Liebovich and Chatham) to ensure they remain accretive to earnings.
- Aerospace Exposure: Monitor the continued decline in aerospace sales and the company's ability to fully replace this volume with semiconductor and construction demand.
- Margin Sustainability: Assess whether the 27.4% gross margin is sustainable given the expectation of rising raw material costs in 2000.
- Debt Covenants: Review the impact of debt covenants (minimum net worth) on the company's ability to pay dividends, which were increased to $0.055 per share in Feb 2000.
- Goodwill Valuation: Evaluate the recoverability of the $215.2 million goodwill balance, which is amortized over 40 years.