Reliance Steel & Aluminum Co. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, compared with the three months ended March 31, 2017. Reliance distributes and processes metal products. All financial amounts below are in U.S. dollars; dollar figures are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net sales | $2,757.1 | $2,419.3; up 14.0% |
| Gross profit and margin | $819.9; 29.7% | $721.6; 29.8% |
| Operating income and margin | $246.4; 8.9% | $190.2; 7.9% |
| Income before taxes | $225.2 | $168.5 |
| Net income attributable to Reliance | $169.0 | $111.7 |
| Diluted earnings per share | $2.30 | $1.52 |
| Effective income tax rate | 24.0% | 32.7% |
| Cash provided by (used in) operations | $13.3 | $(20.7) |
| Cash and cash equivalents | $145.4 | $154.4 at December 31, 2017 |
| Total debt | $2,060.7 | $1,914.5 at December 31, 2017 |
| Net debt-to-total capital ratio | 28.6% | 27.2% at December 31, 2017 |
Gross profit and gross margin are company-presented non-GAAP measures that exclude related depreciation and amortization. Q1 operating cash flow reflected strong earnings but was substantially absorbed by working-capital investment as receivables and inventory grew amid higher metal prices and shipping volumes. Capital expenditures were $41.8 million; acquisition spending was $39.6 million. Financing cash flow included $398.0 million of long-term borrowings, $253.7 million of principal payments, $49.3 million of share repurchases, and $38.5 million of dividends and equivalents.
At March 31, current assets were $3,437.6 million and current liabilities were $874.1 million. Long-term debt was $1,947.1 million. The $1.5 billion revolving credit facility had $690.0 million drawn, $52.9 million in letters of credit, and $757.1 million available. The company reported compliance with its debt covenants, including an interest coverage ratio of approximately 9.8 times versus a 3.0-times minimum and a leverage ratio of 30.7% versus a 60% maximum.
Changes and operating drivers
- Sales rose 14.0%, driven by higher volume and prices. Same-store tons sold increased 3.5%, while same-store average selling price per ton rose 10.0%. Total tons sold were 1.596 million.
- Management cited stronger demand and pricing across nearly all products, with Section 232 tariff developments contributing to customer pre-buying and higher metal prices. The company’s LIFO inventory reserve charge increased to $25.0 million from $10.0 million a year earlier.
- Gross profit dollars reached a company record, while gross margin edged down from 29.8% to 29.7%. Operating margin improved as selling, general and administrative expense fell to 18.8% of sales from 19.7%, reflecting sales growth outpacing expense growth.
- Net income attributable to Reliance increased 51.3%, reflecting higher operating income and a lower tax rate. The lower rate benefited from Tax Reform; the $207.3 million provisional one-time tax benefit was recorded in Q4 2017, not Q1 2018.
- Reliance acquired DuBose on March 1, 2018; its March sales were $2.3 million. Ferguson, acquired in October 2017, generated Q1 2018 sales of $9.5 million. Same-store measures exclude acquisition results.
Outlook, risks, and unusual items
- No specific numerical full-year guidance was provided. Management said it would focus on working-capital management, profitability, growth initiatives, acquisitions, and shareholder returns, and expected sufficient liquidity to meet operating needs and debt obligations.
- Management characterized demand and pricing as strong, but cautioned that Q1 results are not necessarily indicative of full-year results. Some end markets, including energy and non-residential construction, remained below prior peak levels; the company also noted seasonal reductions in shipments during certain holiday-heavy months.
- Section 232 tariffs on certain imported steel and aluminum took effect March 23, 2018, with exemptions and a product-exemption process. The company said it could not yet assess their detailed effects. Changes in tariffs, renewed imports, or lower domestic metal prices could pressure sales, margins, and profitability.
- Other risks include metal-price, demand, availability, foreign-exchange and interest-rate fluctuations; working-capital needs; and potential impairment of goodwill or intangible assets. Goodwill was $1,850.4 million and net intangible assets were $1,115.5 million at quarter-end.
- Environmental remediation at former EMJ operations is expected to be largely covered by insurance; Reliance did not expect a material adverse effect. Pending legal matters were described as routine and not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- The company expects adoption of lease accounting on January 1, 2019 to materially increase reported assets and liabilities, but not materially affect net income, equity, or cash flows.
Important facts for investors to verify
- Whether strong metal pricing and customer demand persist, and how tariff actions, exemptions, and potential import responses affect prices and volumes.
- Whether working-capital growth moderates and operating cash flow converts earnings into cash over subsequent quarters.
- Debt growth, interest costs on variable-rate borrowings, revolving-credit availability, and continued compliance with covenant limits.
- The final purchase-price allocations and ongoing contributions from DuBose and Ferguson.
- Any revisions to the provisional Tax Reform estimates, and impairment indicators affecting the substantial goodwill and intangible-asset balances.