Reliance Steel & Aluminum Co. — Q3 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2019. Reliance distributes and processes metals across diverse end markets. Management described demand as relatively steady and cited strong operational execution. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,685.9 | $2,974.5 | $8,526.0 | $8,720.5 |
| Gross profit | $814.7 | $834.3 | $2,535.2 | $2,571.7 |
| Gross margin | 30.3% | 28.0% | 29.7% | 29.5% |
| Operating income | $241.2 | $214.4 | $788.6 | $788.1 |
| Net income attributable to Reliance | $162.7 | $148.3 | $535.9 | $548.1 |
| Diluted EPS | $2.40 | $2.03 | $7.90 | $7.49 |
- Q3 sales fell 9.7%; nine-month sales fell 2.2%. Q3 same-store tons sold declined 2.0% and average selling price per ton fell 8.8%. For the nine-month period, same-store tons fell 4.4%, partly offset by a 1.0% increase in same-store average selling price.
- Q3 operating income rose 12.5%, helped by the absence of the $35.5 million prior-year impairment charge and lower S,G&A expense; net income attributable to Reliance rose 9.7%. Nine-month net income declined 2.2%, reflecting lower gross profit, higher interest expense and a higher tax rate, partly offset by lower impairment charges.
- Management reported gross margins above its estimated sustainable range of 27%–29%. It attributed margin strength to product mix and pricing discipline, as well as favorable LIFO inventory-reserve adjustments: credits of $40.0 million in Q3 and $75.0 million for nine months of 2019, versus charges of $77.5 million and $165.0 million in the comparable 2018 periods. Gross margin is presented by the company as a non-GAAP measure.
- Nine-month operating cash flow was $954.1, compared with $233.3 in 2018, mainly because of lower working-capital investment. Capital expenditures were $182.8, up from $152.6. Cash and cash equivalents were $166.0 at quarter-end.
- Total debt was $1,651.8 at September 30, down from $2,214.2 at December 31, 2018. Net debt-to-total capital was 22.6%, versus 30.8% at year-end. Revolver availability was $1.05 billion; the company reported compliance with debt covenants.
Material changes, outlook and risks
- Lower Q3 metal prices—particularly carbon steel—and lower tons sold reduced sales. Management said same-store volume declines outperformed reported industry shipment declines. Energy-market demand continued to weaken, while automotive and aerospace demand remained strong and heavy industry was relatively steady.
- Management provided no specific forward earnings or revenue guidance. It said it would continue prioritizing working-capital management, profitability, growth initiatives and shareholder returns, and believes liquidity is adequate for operations, strategic initiatives, dividends and repurchases. The company’s estimated sustainable gross-margin range is 27%–29%.
- The board declared a Q4 dividend of $0.55 per share. Nine-month dividends and dividend equivalents paid were $113.3; share repurchases were $50.0. Approximately 6.4 million shares remained authorized for repurchase.
- Risks highlighted include changes in economic conditions and end-market demand, metals prices and availability, interest rates, foreign exchange and competition. The company noted that lower metal prices and customer demand can affect sales and margins, and that seasonal shipping-day patterns can affect quarterly results.
- Environmental remediation related to former EMJ operations could involve significant cleanup costs, but insurance has covered costs to date and is expected to cover most related costs; management does not expect a material adverse impact. Routine litigation is also not expected to have a material adverse impact. No material risk-factor changes were reported.
- Adoption of lease accounting on January 1, 2019 added $186.3 of operating lease right-of-use assets and $187.1 of lease liabilities, with no material effect on income, equity or cash flows. The filing reports $199.9 of operating lease liabilities at September 30.
Investor verification points
- Assess whether unusually favorable LIFO credits contributed materially to reported margins and how margins compare with management’s 27%–29% sustainable range.
- Track metal pricing, tons sold, end-market demand and working-capital trends, including inventory and receivables.
- Review the reduction in debt, upcoming debt maturities and continued availability under the revolving credit facility.
- Monitor goodwill and intangible assets, which totaled approximately $2.91 billion, and the potential for impairment if business conditions change.
- Confirm the timing and scale of capital expenditures, dividends, repurchases and acquisition activity against cash generation and liquidity.