Business context and reporting period
Reliance Steel & Aluminum Co. filed this Form 10-K for the fiscal year ended December 31, 2018; it is an annual report, not a standalone Q4 filing. Reliance is a metals service-center operator with more than 300 locations, one reportable segment, and more than 125,000 customers. It distributes and processes a broad range of metals, emphasizing small orders, rapid delivery, specialty products, and value-added processing.
Financial performance and liquidity
Amounts are in millions of dollars, except per-share data and percentages. Gross profit and gross margin are the company’s stated non-GAAP measures, excluding related depreciation and amortization.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $11,534.5 | $9,721.0 | +18.7% |
| Gross profit / margin | $3,281.5 / 28.4% | $2,787.8 / 28.7% | +17.7% / -0.3 percentage points |
| Operating income / margin | $937.5 / 8.1% | $662.4 / 6.8% | +41.5% |
| Income before taxes | $850.6 | $583.8 | +45.7% |
| Net income attributable to Reliance | $633.7 | $613.4 | +3.3% |
| Diluted EPS | $8.75 | $8.34 | +4.9% |
| Cash from operations | $664.6 | $399.0 | +$265.6 |
| Capital expenditures | $239.9 | $161.6 | +$78.3 |
Q4 comparison: Net sales were $2,814.0 million versus $2,376.4 million in Q4 2017; gross profit was $709.8 million versus $678.6 million; net income attributable to Reliance was $85.6 million versus $301.4 million; diluted EPS was $1.22 versus $4.09. The prior-year quarter’s net income included a substantial one-time tax-reform benefit.
Balance sheet and funding: At year-end, cash was $128.2 million, working capital $2,585.9 million, total debt $2,214.2 million, and Reliance stockholders’ equity $4,671.6 million. Net debt-to-total capital was 30.8%, up from 27.2%. The $1.5 billion revolving facility had $925.0 million drawn and $533.0 million available, with $42.0 million of letters of credit issued. The company reported compliance with its debt covenants. A 100-basis-point rise in variable rates would add an estimated $14.6 million in annual interest expense.
Changes versus prior periods
- Record annual sales, gross profit, pretax income, and diluted EPS reflected higher metal prices, healthy demand, acquisitions, and increased value-added processing. Same-store tons sold rose 0.8%, while same-store average selling price per ton increased 17.3%.
- Section 232 steel and aluminum tariffs contributed to higher selling prices and were described as favorable to results. The company said prices improved for almost every product it sells.
- Gross margin edged down to 28.4% from 28.7%. The LIFO inventory valuation reserve adjustment was a $271.8 million charge in 2018; higher metal costs were the principal factor.
- Operating cash flow increased despite higher working-capital needs. Inventory turnover declined to 4.2 times from 4.5 times; average days sales outstanding improved slightly to 41.9 from 42.1.
- Reliance completed acquisitions of All Metals, KMS, and DuBose, bought the remaining 40% of Acero Prime, and spent $484.9 million on share repurchases versus $25.0 million in 2017. Debt rose from $1,914.5 million at year-end 2017.
- The effective tax rate was 24.5% in 2018, compared with negative 6.4% in 2017, when a provisional $207.3 million net tax benefit from tax reform was recognized.
Outlook, risks, and unusual items
- Management expects to continue organic investment and acquisitions, emphasizing diversification, specialty products, and processing. The 2019 capital expenditure budget is approximately $230 million, including growth projects; estimated annual maintenance spending is $90–$100 million. No specific earnings or revenue guidance is provided in the filing.
- Management cited sufficient liquidity and plans to continue growth investment and shareholder returns. The board raised the quarterly dividend 10% to $0.55 per share in February 2019. Future dividends and repurchases remain subject to business and capital conditions.
- Key risks include metal-price volatility and the possibility that cost changes cannot be passed through; rapid price declines that could impair inventory margins; tariff changes or retaliation; economic and end-market cyclicality; supplier concentration/consolidation; competition; and the effects of working-capital needs and variable-rate debt.
- Other material risks include acquisition integration and goodwill/intangible-asset impairment, international and foreign-exchange exposure, cybersecurity and privacy events, environmental and workplace regulation, labor matters, and customer credit risk. Management disclosed prior cybersecurity events but said none had materially affected operations or financial results to date.
- 2018 impairment and restructuring charges totaled $39.5 million, primarily related to downsizing an energy business and impairing related assets. The company also disclosed an environmental remediation matter associated with former EMJ operations; insurance has covered substantially all costs to date and is expected to cover most remaining costs. Pending litigation was described as routine and not expected to have a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of December 31, 2018.
Important facts for investors to verify
- How 2019 metal prices, demand, tariff policy, and the unusually large 2018 LIFO charge may affect margins and cash generation.
- Whether the reported 28.4% gross margin is sustainable as pricing and inventory costs change, and how much results depend on pricing versus shipment volumes.
- Debt maturities, refinancing capacity, variable-rate exposure, covenant headroom, and the company’s ability to fund planned capital expenditures and shareholder returns.
- Returns and integration progress for the 2018 acquisitions, and the assumptions underlying goodwill and intangible-asset valuations, particularly in energy-related operations.
- The filing’s LIFO disclosures: MD&A cites a $271.8 million 2018 charge and $30.7 million for 2017, while the inventory note table reports $73.3 million for 2017; reconcile the 2017 amount in the underlying statements and notes.