Reliance Steel & Aluminum Co. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions except per-share data, percentages, and where otherwise noted.
Business context
Reliance distributes and processes metals through service centers. Management described improving U.S. industrial demand and pricing, with growth also reflecting acquisitions, including Metals USA (acquired in 2013). In Q3 2014, same-store tons sold rose 6.6% year over year; same-store sales increased 9.6%.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,705.1 | $2,443.5 | $7,874.9 | $6,917.1 |
| Operating income | $151.3 | $163.1 | $481.3 | $438.6 |
| Net income attributable to Reliance | $95.5 | $95.1 | $279.2 | $259.8 |
| Diluted EPS | $1.21 | $1.22 | $3.55 | $3.35 |
| Gross margin | 25.1% | 26.3% | 25.4% | 25.9% |
| Operating margin | 5.6% | 6.7% | 6.1% | 6.3% |
Q3 sales increased 10.7%, but operating income fell 7.2%; Reliance-attributable net income was nearly flat. For the nine-month period, sales increased 13.8% and Reliance-attributable net income increased 7.5%. Q3 average selling price per ton rose 4.3% year over year, while the nine-month average fell 1.6%.
Operating cash flow was $162.8 for the first nine months, versus $513.0 in 2013. Capital expenditures were $134.4, compared with $118.7. The resulting operating cash flow less capital expenditures was $28.4 (calculated). Cash at September 30 was $100.7.
Total debt was $2,325.0, up from $2,112.3 at year-end 2013; net debt-to-capital was 35.1%, versus 34.3%. Reliance had $667.0 drawn on its $1.5 billion revolving facility and $774.3 available, with $58.7 of letters of credit outstanding. It reported compliance with debt covenants.
Changes, outlook, and notable items
- Management attributed the lower Q3 operating result and margins principally to lower gross margin and antitrust-litigation settlement charges. The filing reports $13.5 of related Q3 charges and $25.0 for the nine-month period.
- Operating cash flow declined mainly because higher demand and metal prices required increased investment in receivables and inventory. Inventory turns were approximately 4.2 times; management said it expects improvement over coming quarters.
- Reliance acquired aerospace materials provider All Metal Services and Northern Illinois Steel Supply on August 1, for a combined transaction value of $145.7, including $41.7 of assumed debt. It also sold Metals USA’s non-core roofing business for net proceeds of $26.2 and recorded a $1.1 pretax loss.
- After quarter-end, Reliance settled its Texas antitrust claims for $23.0. A prior $10.0 charge had been recorded; the filing describes settlement-related charges in reported-period SG&A. The judgment was released and the company dismissed its appeal.
- Management expected lower Q4 volume due to normal holiday seasonality and fewer shipping days. It also cited weakness in some carbon-steel mill prices and falling nickel prices as potential earnings pressures. Management stated that continued demand improvement, particularly in non-residential construction, could support meaningfully higher earnings; no specific earnings guidance was provided.
- After quarter-end, the board declared a $0.35-per-share Q4 dividend and extended the repurchase program. Reliance repurchased approximately $40.0 of shares from October 27–30, 2014. It also increased its Acero Prime ownership to 51% on October 1.
- Other risks include competition and import pressure, metal-price and foreign-exchange fluctuations, seasonal demand, and estimates for goodwill, intangible assets, and litigation. Environmental remediation obligations are described as potentially significant, though insurance is expected to cover most costs; management did not expect a material adverse impact.
Important facts for investors to verify
- Whether sales and earnings growth persist after separating acquisition contributions from same-store performance.
- Whether working-capital investment converts back into operating cash flow and inventory turns improve.
- How steel, stainless-steel, and other metal pricing, imports, and LIFO inventory adjustments affect margins.
- The final accounting and cash impact of the $23.0 antitrust settlement and the recently completed acquisitions.
- Debt maturities, revolving-facility availability, covenant headroom, and the effect of dividends and repurchases on leverage.