Reliance Steel & Aluminum Co. — Q2 2018 Form 10-Q
Business context and period: The filing reports the quarter and six months ended June 30, 2018. Reliance distributes and processes metals, primarily selling inventory in the spot market. Results were unaudited and prepared under U.S. GAAP.
Key financial metrics
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $2,988.9 | $2,475.2 | $5,746.0 | $4,894.5 |
| Gross profit / margin | $917.5 / 30.7% | $702.1 / 28.4% | $1,737.4 / 30.2% | $1,423.7 / 29.1% |
| Operating income / margin | $327.3 / 11.0% | $171.2 / 6.9% | $573.7 / 10.0% | $361.4 / 7.4% |
| Net income attributable to Reliance | $230.8 | $103.0 | $399.8 | $214.7 |
| Diluted EPS | $3.16 | $1.40 | $5.46 | $2.92 |
| Cash from operating activities | — | $97.0 | $15.2 |
Gross profit and gross margin are company-presented non-GAAP measures that exclude depreciation and amortization associated with sales. Q2 sales rose 20.8% year over year and six-month sales rose 17.4%. Same-store tons sold increased 2.7% and 3.1%, respectively; same-store average selling price per ton rose 17.7% and 13.9%.
At June 30, cash was $124.3, total debt was $2,048.9, and net debt-to-total capital was 27.9%, versus 27.2% at December 31, 2017. The company had $760.8 available on its revolving facility after borrowings and letters of credit. Current assets were $3,648.2 and current liabilities were $899.4. Six-month capital expenditures were $98.6; dividends and dividend equivalents paid were $74.6; share repurchases were $50.0.
Material changes and drivers
- Higher metal prices and modestly higher shipment volumes drove revenue and profit growth. Management cited solid demand and favorable pricing effects from Section 232 steel and aluminum tariffs. Q2 gross profit and pretax income were company records.
- Gross margin expanded 2.3 percentage points in Q2 and 1.1 points for the first half. Selling, general and administrative expense rose in dollars, partly due to incentive compensation and freight costs, but declined as a share of sales.
- Higher prices and shipping volumes increased working-capital needs: accounts receivable and inventory cash uses were $295.0 and $332.0 for the first half. Operating cash flow nevertheless improved from the prior-year period.
- Debt increased from $1,914.5 at year-end 2017. First-half acquisition spending was $39.6, including the March acquisition of DuBose; Ferguson, acquired in 2017, contributed $19.4 of first-half 2018 sales. Reliance also acquired KMS Fab and KMS South on August 1, 2018; their 2017 combined sales were $23.3.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it would focus on working-capital management, profitability, growth initiatives, acquisitions and stockholder returns, and expected liquidity to remain sufficient.
- Management said the company’s diversified products, end markets and geographic footprint help mitigate earnings volatility. It also noted improving heavy-industry, construction and energy demand, while energy demand remained well below its 2014 peak.
- Section 232 tariffs supported metal prices and results, but tariff expiry or relaxation, increased imports, or retaliatory trade measures could pressure prices, demand and profitability. Metal pricing, demand, availability, competition, foreign exchange and interest rates are market risks.
- Q2 and first-half 2018 effective tax rates were 24.0%, compared with 31.2% and 32.0% in 2017. The lower rate reflected Tax Reform; the $207.3 provisional one-time tax benefit was recorded in Q4 2017, not in the current periods. Management said estimates remained subject to interpretation and clarification.
- LIFO inventory reserve charges were $62.5 in Q2 and $87.5 for the first half, versus $10.0 and $20.0 in 2017. Variable-rate credit-facility borrowings had higher weighted-average rates than at year-end 2017. The company reported compliance with debt covenants.
- Environmental remediation costs at former operations are expected to be largely covered by insurance; management did not expect a material adverse effect. Pending legal matters were described as routine and not expected to be material.
- Adoption of the new lease standard was expected on January 1, 2019 and to materially increase reported assets and liabilities, with no material impact expected on net income, equity or cash flows. The DuBose purchase-price allocation was preliminary.
Important facts for investors to verify
- Whether metal-price and tariff-related gains persist, and how margins respond if input prices reverse or imports rise.
- Whether working-capital investment and inventory turns support sustained cash conversion as prices and volumes change.
- Debt levels, variable interest costs, covenant headroom and liquidity after acquisitions, capital spending, dividends and repurchases.
- Final acquisition accounting for DuBose and the subsequent financial contribution and funding of KMS.
- Potential tax estimate changes and the eventual balance-sheet effect of lease-standard adoption.