Reliance Steel & Aluminum Co. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Reliance operates one reportable segment: metals service centers.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $2,055.3 million | $2,138.6 million | $6,553.3 million | $6,100.8 million |
| Operating income | $152.6 million | $140.1 million | $523.4 million | $460.5 million |
| Operating margin | 7.4% | 6.6% | 8.0% | 7.5% |
| Net income attributable to Reliance | $98.1 million | $84.9 million | $323.1 million | $275.9 million |
| Diluted EPS | $1.30 | $1.13 | $4.28 | $3.68 |
| Cash dividends per share | $0.25 | $0.12 | $0.55 | $0.36 |
- Gross profit, a company-presented non-GAAP measure that excludes related depreciation and amortization, was $535.3 million (26.0% of sales) in Q3 and $1,682.5 million (25.7%) for nine months. The comparable margins were 23.1% and 24.8%.
- Operating cash flow was $268.8 million for the first nine months, versus $17.3 million a year earlier. Capital expenditures were $137.4 million; acquisitions, net of cash acquired, used $83.0 million. Cash increased to $120.6 million from $84.6 million at year-end 2011.
- At September 30, total debt was $1.37 billion, including $680.0 million outstanding on a $1.5 billion revolving facility. Net debt-to-total capital was 26.4%, down from 28.4% at year-end 2011. The company reported $1.28 billion of long-term debt and $88.8 million of current debt and short-term borrowings.
Changes and management commentary
- Q3 sales fell 3.9% year over year, while same-store sales fell 6.6%. Tons sold increased 2.0% overall and 1.4% same-store, but average selling price per ton decreased 6.3% overall and 8.4% same-store. For nine months, sales rose 7.4% overall and 2.3% same-store; tons sold rose 8.5% and 6.2%, respectively.
- Management attributed price pressure to lower mill pricing, raw-material and scrap costs, high imports, and domestic overcapacity. Aerospace, farm and heavy equipment, and auto were among stronger markets; energy remained strong relative to other markets, while non-residential construction remained weak.
- Improved gross profit and acquisition contributions lifted earnings, but SG&A rose 8.1% in Q3 and 10.3% for nine months, reflecting acquisitions and higher warehouse and delivery costs. Lower selling prices also pushed Q3 SG&A to 16.8% of sales from 14.9%.
- LIFO reserve adjustments provided a $27.0 million cost-of-sales credit in both the three- and nine-month 2012 periods, versus charges of $22.5 million and $67.5 million in the respective 2011 periods. Management estimated a full-year 2012 LIFO credit of $36.0 million.
- 2012 acquisitions included Airport Metals (Australia), the Worthington Steel Vonore plant, National Specialty Alloys, and McKey Perforating; combined transaction value was $112.6 million, including assumed and repaid debt. On October 1, the company also acquired GH Metal Solutions and Sunbelt Steel Texas, funded with revolver borrowings.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management said it expected adequate operating cash flow and revolver capacity to meet debt, working-capital, capital spending, growth and dividend needs, and anticipated continued acquisitions and other growth activities.
- The company reported compliance with debt covenants. Interest coverage was approximately 10.8 times against a 3.0-times minimum; leverage was 28.7% against a 60% maximum. A $75.0 million private-placement note matures in July 2013.
- Key exposures include changing metal prices and demand, interest rates, foreign currency, competition and economic conditions. Management reported no significant change in market-risk exposures and no material change in previously disclosed risk factors. Results may vary seasonally, and interim results are not necessarily indicative of full-year results.
- Environmental remediation obligations relate to former EMJ manufacturing operations; insurance is expected to cover most costs, and the company did not expect a material adverse impact. Goodwill and other intangible assets were substantial—$1.28 billion and $909.9 million, respectively—and management reported no impairment indicators at September 30.
Investor verification priorities
- Assess how much earnings improvement reflects underlying operations versus the $27.0 million LIFO credit and acquisition contributions.
- Track same-store pricing, shipment volumes, and inventory levels; inventories rose to $1.38 billion from $1.21 billion at year-end.
- Review the funding and integration of the October acquisitions, debt maturities, and revolver availability.
- Verify the assumptions supporting the estimated full-year LIFO credit and the upcoming goodwill impairment assessment.