Reliance Steel & Aluminum Co. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. The filing reports full-year results and unaudited quarterly results, including Q4. Reliance is a metals service-center distributor and processor operating more than 300 locations, with one reportable segment.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $8.613 billion | $9.351 billion |
| Gross profit / margin | $2.590 billion / 30.1% | $2.547 billion / 27.2% |
| Operating income / margin | $512.6 million / 6.0% | $546.6 million / 5.8% |
| Net income attributable to Reliance | $304.3 million | $311.5 million |
| Diluted EPS | $4.16 | $4.16 |
| Cash provided by operations | $626.5 million | $1.025 billion |
| Capital expenditures | $154.9 million | $172.2 million |
- Sales fell 7.9%; tons sold declined 1.5% overall and 2.7% on a same-store basis, while average selling price per ton fell 6.8% overall and 7.3% same-store.
- Despite lower sales, gross profit rose 1.7% and gross margin reached a company record. Management attributed this to pricing discipline, quick-turn smaller orders, increased value-added processing and inventory management. Gross profit and gross margin are non-GAAP measures as presented in the filing.
- Operating income declined 6.2%. The effective tax rate decreased to 28.0% from 31.1%, partly reflecting settlement of a previously uncertain tax position.
- Q4 sales were $2.062 billion versus $2.026 billion in Q4 2015; Reliance-attributable net income was $61.7 million versus $68.6 million, and diluted EPS was $0.84 versus $0.94.
Liquidity, debt and capital allocation
- At year-end, cash was $122.8 million, working capital was $2.033 billion, and total debt was approximately $1.945 billion. Net debt-to-total capital was 30.3%, down from 31.8% a year earlier.
- The $1.5 billion revolving credit facility had $540.0 million drawn and $897.4 million available, after letters of credit. The company reported compliance with its debt covenants; interest coverage was about 7.0 times against a 3.0-times minimum, and the covenant leverage ratio was 32.5% against a 60% maximum.
- Operating cash flow was lower than in 2015, principally because 2015 had benefited from reduced receivables and inventory. Reliance spent $348.7 million, net of acquired cash, on acquisitions and paid $120.4 million in dividends and dividend equivalents. No shares were repurchased in 2016.
- The company completed three acquisitions in 2016: Tubular Steel, Best Manufacturing and Alaska Steel. The 2017 capital expenditure budget was approximately $200 million, including growth projects; estimated maintenance spending was $80–$90 million.
Changes, outlook and risks
- Metal prices and sales volumes remained pressured, particularly in carbon and stainless steel. Same-store selling prices improved sequentially in the final three quarters of 2016; Q4 same-store average selling price was 2.4% above Q4 2015. Management said most end markets were relatively stable, but energy and heavy industry weakened. Energy-market tons fell about 32% year over year.
- Impairment and restructuring charges were $69.1 million in 2016, versus $56.3 million in 2015, mainly relating to energy-related businesses and planned closures or sales of certain locations. The filing reports no goodwill impairment, but includes $36.4 million of impairment losses on indefinite-lived intangible assets in 2016.
- Management expressed confidence in long-term prospects and planned continued investment, acquisitions and internal growth, while emphasizing working-capital management and profitability. The filing provides no quantified earnings or sales guidance.
- Principal risks include volatile metal prices and inventory valuation, cyclical demand, import competition and foreign exchange, customer credit exposure, supplier availability, acquisition integration, and execution of a multi-year ERP implementation. International operations, cybersecurity, environmental obligations, labor agreements and substantial variable-rate debt also present risks. A 100-basis-point increase in rates on the reported $1.2 billion of variable-rate debt would add about $12 million of annual interest expense.
- Reliance disclosed an ongoing environmental remediation matter related to former EMJ operations; insurance had covered substantially all costs to date and was expected to cover most future costs. The company said it did not expect a material financial impact. Routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sequential metal-price improvement continued and whether Reliance could sustain its record gross margin as pricing, volumes and LIFO adjustments changed.
- The outlook and remaining exposure of energy-related operations, including future impairment or restructuring charges.
- Cash conversion and working-capital trends, particularly inventory levels and operating cash flow relative to acquisitions, capital spending and dividends.
- Debt maturities, variable-rate exposure, revolving-facility availability and covenant headroom as the company funds growth plans.
- Returns and integration progress from the 2016 acquisitions, and the assumptions underlying goodwill and intangible-asset valuations.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2016.