Reliance Steel & Aluminum Co. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018, compared with the same 2017 periods. Reliance distributes and processes metal products, primarily through spot-market sales. Metal product sales represented approximately 94% of revenue for the first nine months.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,974.5 million | $2,450.1 million | $8,720.5 million | $7,344.6 million |
| Gross profit / margin | $834.3 million / 28.0% | $685.5 million / 28.0% | $2,571.7 million / 29.5% | $2,109.2 million / 28.7% |
| Operating income | $214.4 million | $158.7 million | $788.1 million | $520.1 million |
| Net income attributable to Reliance | $148.3 million | $97.3 million | $548.1 million | $312.0 million |
| Diluted EPS | $2.03 | $1.32 | $7.49 | $4.24 |
| Effective tax rate | 22.9% | 30.4% | 23.7% | 31.5% |
For the nine months, operating cash flow was $233.3 million, investing cash outflow was $189.0 million, and financing cash outflow was $83.8 million. Cash declined $42.3 million from year-end 2017 to $112.1 million. Capital expenditures were $152.6 million; acquisition spending was $55.6 million.
At September 30, total debt was $2.08 billion, compared with $1.91 billion at December 31, 2017. The net debt-to-total capital ratio was 28.2%, up from 27.2%. Reliance had $706.2 million available on its revolving facility, alongside $112.1 million of cash. It reported compliance with debt covenants; interest coverage was 12.2 times versus a 3.0-times minimum, and the credit-agreement leverage ratio was 29.7% versus a 60% maximum.
Material changes versus the prior comparable periods
- Sales rose 21.4% in Q3 and 18.7% year to date. Management attributed growth principally to higher metal prices, supported by solid demand and Section 232 tariffs.
- Same-store average selling price per ton increased 22.4% in Q3 and 16.7% year to date. Same-store tons sold declined 1.4% in Q3 but increased 1.6% year to date.
- Operating income increased 35.1% in Q3 and 51.5% year to date; Reliance-attributable net income increased 52.4% and 75.7%, respectively. Lower effective tax rates also contributed to net income growth.
- SG&A as a percentage of sales declined to 17.9% in Q3 and 18.2% year to date, from 19.2% and 19.4%. The company said higher sales levels drove the ratio improvement, despite higher incentive compensation and freight costs.
- Operating cash flow improved from $198.3 million to $233.3 million year to date, despite increased working-capital needs. Receivables and inventories rose, reflecting higher metal prices and activity.
Outlook, commentary, risks and unusual items
- Management described Q3 as the company’s second-highest quarterly sales and gross-profit result, after records in Q2. Reported gross margins of 28.0% for Q3 and 29.5% year to date were within or above the company’s estimated 27%–29% range. The filing does not provide a separate forward-period earnings or revenue forecast.
- Reliance cited improving heavy-industry and construction activity, continued strength in automotive and aerospace, and gradual improvement in energy demand, which remained below its 2014 peak. It plans to focus on working capital, profitability, growth and shareholder returns.
- Q3 and year-to-date impairment and restructuring charges totaled $36.8 million, mainly related to downsizing an energy business because of competitive changes. This included $35.5 million of impairment charges, primarily on intangible assets.
- LIFO inventory-reserve expense was $77.5 million in Q3 and $165.0 million year to date, versus $6.3 million and $26.3 million in the comparable 2017 periods.
- Management warned that a rapid decline in metal prices could materially hurt gross profit and pretax income. Tariff changes, retaliatory trade measures, foreign imports, demand, metal availability, interest rates and foreign currency are additional risks. Tariffs had supported prices and results, but their continuation is uncertain.
- Environmental remediation at former operations is expected to be largely covered by insurance; the company did not expect a material adverse impact. Pending legal matters were described as routine, with no expected material effect.
- The company expects adoption of the lease accounting standard in 2019 to materially increase reported assets and liabilities, but not materially affect net income, equity or cash flows; the ultimate balance-sheet impact was not yet quantified.
- After quarter-end, Reliance acquired the remaining 40% interest in Acero Prime, increasing ownership to 100%; it also extended and expanded its share repurchase authorization.
Important facts for investors to verify
- Whether metal prices and tariff-related benefits persist, and how any price reversal would affect margins and inventory valuation.
- Whether sales growth can be sustained given Q3’s lower same-store tonnage and the company’s working-capital demands.
- The performance of the energy business following its downsizing, and any further impairment or restructuring charges.
- Debt, borrowing costs, covenant headroom, and liquidity as acquisitions, capital expenditures, dividends and share repurchases continue.
- The final purchase-price allocations for the 2018 acquisitions and the eventual balance-sheet effect of lease-standard adoption.
- Any material changes to tax estimates related to the 2017 Tax Act; the filing says interim adjustments to provisional estimates were not significant.