Reliance Steel & Aluminum Co. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Reliance distributes and processes metals across multiple end markets.
Financial performance
- Net sales: $2.573 billion, down 13.0%. Same-store tons sold fell 2.3%; same-store average selling price per ton fell 11.8%, reflecting weaker metal pricing, especially carbon steel.
- Profit and margins: Gross profit was $780.7 million, down 9.9%; reported gross margin was 30.3%, versus 29.3%. Operating income was $103.3 million versus $280.8 million; operating margin was 4.0% versus 9.5%. Net income attributable to Reliance was $61.7 million versus $190.1 million; diluted EPS was $0.92 versus $2.80.
- Significant charge: A $137.5 million impairment and restructuring charge reduced pretax income margin by 540 basis points and diluted EPS by $1.53, according to management. Excluding the $39.8 million restructuring charge, gross margin was 31.9%; management said net margin excluding the total charge was 6.4%.
- Cash flow: Operating cash flow was $170.8 million, up from $117.2 million, primarily due to lower working-capital investment. Capital expenditures were $55.5 million. Cash ended the quarter at $172.1 million, versus $174.3 million at year-end 2019.
- Debt and liquidity: Total debt was $1.844 billion, up from $1.596 billion at December 31, 2019. The company reported $831.5 million available on its revolving facility and a 25.4% net debt-to-total capital ratio, versus 21.4% at year-end. It was in compliance with debt covenants; reported interest coverage was 13.1 times against a 3.0-times minimum, and leverage was 27.7% against a 60% maximum.
- Shareholder returns: Reliance repurchased 3.33 million shares for $300 million at an average $90.09 per share. The Q1 dividend was $0.625 per share, up from $0.55 a year earlier; a $0.625 Q2 dividend was declared after quarter-end.
Material changes and unusual items
- Crude oil price declines and a weaker long-term energy outlook led the company to close three energy-related businesses and recognize $97.7 million of asset impairment and $39.8 million of restructuring costs, including an inventory provision.
- Debt increased during the quarter, alongside the $300 million share repurchase. Reliance also purchased the remaining 49% interest in Feralloy Processing Company for $8.0 million, raising ownership to 100%.
- Foreign-currency translation reduced other comprehensive income by $31.4 million. Goodwill was $2.00 billion and net intangible assets were $928.0 million at quarter-end.
Outlook, management commentary, and risks
Management reported solid demand through most of Q1, but said demand weakened late in March as COVID-19 disruptions spread. Most locations continued operating as essential businesses, while automotive-related toll processing fell sharply and the company reduced staffing at its largest U.S. tolling operations by about 50%. Non-residential demand slowed late in the quarter; commercial aerospace was expected to weaken from Q2. Tons sold declined about 20% in the first two-and-a-half weeks of April compared with the same period in March.
The company reduced its 2020 capital expenditure budget from approximately $250 million to $190 million and shifted capital allocation toward cash preservation, including inventory management and pausing non-essential spending. It stated that the duration and financial effects of COVID-19 could not be reliably estimated; no specific earnings or sales guidance was provided. Further demand deterioration could affect cash generation, liquidity, access to financing, and asset values, and could prompt additional impairments. Energy-market assumptions and discounted-cash-flow estimates are also significant sources of judgment. Management considered its liquidity adequate for foreseeable needs.
Reliance said routine litigation and an environmental remediation matter were not expected to have a material adverse effect; insurance was expected to cover most remediation costs. The company was in compliance with its credit covenants at March 31, 2020.
Important facts for investors to verify
- Subsequent sales, tons sold, pricing, and customer demand across automotive, energy, aerospace, and non-residential construction.
- Whether cash flow and available revolving-credit capacity remain sufficient as operations and working capital respond to COVID-19.
- Debt maturities and refinancing needs, including $80.2 million of debt obligations due before the revolving facility expires in September 2021.
- Assumptions behind the energy-related impairment and the risk of further impairment to goodwill or intangible assets.
- Execution of the reduced capital expenditure plan and sustainability of dividends and share repurchases amid uncertain conditions.