Reliance Steel & Aluminum Co. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company operates metals service centers and reports one segment. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $2,288.3 | $1,912.7 | +19.6% |
| Gross profit / margin | $577.8 / 25.3% | $506.3 / 26.5% | Profit +14.1%; margin down 1.2 points |
| Operating income / margin | $184.6 / 8.1% | $154.8 / 8.1% | +19.3% |
| Net income attributable to Reliance | $116.2 | $92.3 | +25.9% |
| Diluted EPS | $1.54 | $1.23 | +$0.31 |
| Operating cash flow | $(63.2) | $(101.4) | Cash use improved $38.2 |
| Capital expenditures | $34.6 | $35.8 | Down $1.2 |
Sales growth reflected higher volume, higher average selling prices and acquisitions. Same-store sales rose 12.9%; same-store tons sold increased 10.2%, and same-store average selling price per ton rose 2.6%. Gross margin contracted as 2012 mill price increases were smaller and harder to pass through than the substantial increases in Q1 2011. The LIFO expense was $7.5 million versus $20.0 million a year earlier. Management estimated a full-year 2012 LIFO charge of about $30 million.
Financial position and liquidity
- At March 31, cash was $70.0 million, total debt was $1.43 billion, and shareholders’ equity was $3.27 billion. Debt increased from $1.33 billion at year-end 2011; net debt-to-total capital rose to 29.4% from 28.4%.
- Current assets were $2.59 billion and current liabilities were $675.7 million. Receivables were $1.04 billion and inventory was $1.40 billion. Working-capital growth contributed to operating cash outflow: receivables and FIFO inventory increased by $143.6 million and $189.7 million, respectively, partly offset by higher payables and accrued expenses.
- The $1.5 billion revolving facility had $745.0 million drawn. The company reported $35.5 million of letters of credit and availability to issue an additional $214.5 million of letters of credit. Revolver borrowings had a weighted-average rate of 1.74% at quarter-end.
- Debt covenants were met: interest coverage was about 10.1x against a 3.0x minimum; leverage was 31.0% against a 60% maximum. The company stated it had adequate liquidity and facility capacity for debt, working capital, capital spending and growth needs.
- Financing provided $91.0 million of cash, including $221.0 million of long-term borrowings and $122.2 million of principal payments. Cash declined by $14.6 million during the quarter.
Changes, outlook and notable items
- Management described demand as improving across most markets, with strength in energy, oil and gas, aerospace, farm and heavy equipment, automotive toll processing, general manufacturing, and semiconductor and electronics. Non-residential construction improved, mainly in industrial projects, but remained weaker than other areas.
- 2012 capital expenditures were budgeted at approximately $250 million. Management expected to continue acquisitions and other growth activity, funded in the near term from operating cash and revolver borrowings. No earnings or revenue guidance was provided.
- The company acquired McKey Perforating effective February 1, 2012; it contributed $3.6 million of sales in the two months through March 31. After quarter-end, it acquired National Specialty Alloys on April 4 and the Worthington Steel Vonore plant on April 27. The filing says the post-quarter acquisitions were funded with approximately $101.9 million of revolver borrowings.
- The 2011 Continental acquisition contributed approximately $125 million of Q1 2012 sales. Its purchase price allocation, as well as McKey’s, remained preliminary.
- The quarterly dividend increased 25%, from $0.12 to $0.15 per share. The board declared another $0.15-per-share dividend for Q2.
- Environmental remediation obligations relate to former EMJ manufacturing operations. Insurance was expected to cover most costs, and management did not expect a material adverse effect. The filing disclosed no material changes in risk factors or market-risk exposures and no indications of goodwill or indefinite-lived intangible impairment at quarter-end.
Key facts for investors to verify
- Whether improved demand and volume persist, and whether the company can pass through future metal-cost increases without further gross-margin pressure.
- Working-capital requirements, inventory levels and cash conversion, given the quarterly operating cash outflow and planned capital expenditures.
- Post-quarter acquisition financing, integration results and the effect of additional borrowing on leverage and liquidity.
- The estimated $30 million full-year LIFO charge, the preliminary acquisition purchase-price allocations, and the assumptions supporting goodwill and intangible-asset recoverability.
- Progress on environmental remediation and the extent to which insurance covers actual costs.