Reliance Steel & Aluminum Co. — Q3 2017 Form 10-Q
Business context and period: The filing reports the three and nine months ended September 30, 2017, compared with the same 2016 periods. Reliance distributes and processes metals. Results benefited from improved demand, higher metal prices, and higher shipment volumes. Financial amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2,450.1 | $2,185.2 | $7,344.6 | $6,551.8 |
| Gross profit | $685.5 | $654.6 | $2,109.2 | $1,976.4 |
| Gross profit margin | 28.0% | 30.0% | 28.7% | 30.2% |
| Operating income | $158.7 | $94.8 | $520.1 | $400.3 |
| Net income attributable to Reliance | $97.3 | $49.5 | $312.0 | $242.6 |
| Diluted EPS | $1.32 | $0.68 | $4.24 | $3.32 |
Sales grew 12.1% in both periods. Tons sold increased 5.3% in Q3 and 3.0% year to date; same-store average selling prices rose 6.8% and 9.3%, respectively. Gross profit margin is a company-presented non-GAAP measure that excludes depreciation and amortization associated with sales. The company said margins remained within its 27%–29% target range; Q3 gross profit was its third-highest quarterly result on record.
- Cash flow: Operating cash flow was $198.3 for the nine months, versus $387.6 in 2016. Capital expenditures were $118.1; investing cash outflow was $99.8. Cash increased to $170.2 from $122.8 at year-end 2016.
- Liquidity and debt: Total debt was $1,989.5, compared with $1,945.0 at year-end 2016. Net debt-to-total capital was 29.0%, down from 30.3%. The revolving facility had $827.0 available, after $610.0 drawn and $63.0 in letters of credit. Current assets were $3,169.1 and current liabilities $781.2.
- Debt capacity: The company reported compliance with financial covenants. Interest coverage was approximately 8.9 times against a 3.0-times minimum; its credit-agreement leverage ratio was 31.6% against a 60% maximum.
- Dividends: Cash dividends per share were $0.45 in Q3 and $1.35 for the nine months. The board declared a fourth-quarter dividend of $0.45 per share, payable December 8, 2017.
Changes and notable items
- Operating income and Reliance-attributable net income rose substantially, helped by higher sales and lower impairment and restructuring charges. Q3 operating income increased 67.4%; nine-month operating income rose 29.9%.
- Gross margin declined year over year despite higher gross profit dollars. The company cited a more stable pricing environment in 2017 versus the rising-price environment in 2016; LIFO inventory valuation charges were $6.3 in Q3 and $26.3 year to date, versus $11.3 credits in both 2016 comparison periods.
- Q3 and nine-month 2017 impairment and restructuring charges totaled $2.1 and $2.4, respectively, versus $67.3 in the comparable 2016 periods. The 2016 charges mainly related to energy businesses amid low oil prices and weaker demand.
- Cash from operations fell mainly because higher metal prices and shipment volumes increased receivables and inventory. Receivables rose to $1,166.0 and inventory to $1,772.5 from $960.2 and $1,532.6, respectively, at year-end 2016.
- Nine-month interest expense declined to $54.9 from $65.6, partly because $350.0 of 6.20% notes were repaid in November 2016 and replaced with lower-rate borrowing. The 2016 nine-month effective tax rate benefited by $17.6 from resolution of a previously uncertain tax position; 2017 rates were 30.4% for Q3 and 31.5% year to date.
- On October 2, 2017, Reliance acquired Ferguson Perforating Company, with 2016 sales of approximately $31.0, using revolving-credit borrowings. The company said the acquisition did not significantly affect its net debt-to-total capital ratio.
Outlook, risks, and contingencies
No numerical revenue or earnings guidance was provided. Management cited continued focus on working-capital management, profitability, and growth initiatives, and said it believed liquidity was sufficient to fund operations, debt repayments, and future growth. Demand improved in automotive, aerospace, construction, and energy compared with 2016, but energy demand remained well below its 2014 peak; heavy-industry demand remained relatively weak. Management expects diversified end markets, products, and geography to help moderate earnings volatility.
Key exposures include metal-price and demand changes, interest rates, foreign exchange, and broader economic conditions. The company noted that goodwill and intangible assets were substantial—$1,834.0 and $1,116.8, respectively—and are subject to impairment assessment. Environmental remediation at a former subsidiary operation could involve significant costs, but insurance was expected to cover most costs incurred and future related costs; management did not expect a material adverse effect. Routine litigation was not expected to materially affect results. The filing reported no material changes to previously disclosed risk factors or market-risk exposures.
Investor verification points
- Assess whether the volume and metal-price gains, and the 27%–29% gross-margin target, are sustainable; distinguish reported gross profit from the company’s non-GAAP margin measure.
- Track working-capital needs, especially receivables and inventory, and the effect on operating cash flow as metal prices and shipment volumes change.
- Review debt balances, variable-rate borrowing costs, covenant headroom, and the use of revolving credit to fund the Ferguson acquisition and other growth.
- Compare earnings across periods while accounting for the unusually large 2016 impairment charges, 2016 tax benefit, 2017 LIFO charges, and machinery-sale gains.
- Monitor energy-market recovery and the carrying values of goodwill and intangible assets, as well as developments in environmental remediation and routine legal matters.