Business context and reporting period
Reliance Steel & Aluminum Co. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The metals distributor reported results for the three and nine months ended September 30, 2015, compared with the same periods in 2014.
Management cited lower metals prices and substantially weaker oil-and-gas demand as key pressures. Same-store shipments declined less than the industry, while pricing fell sharply.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $2,286.2 million | $2,705.1 million | $7,324.3 million | $7,874.9 million |
| Gross profit margin | 27.9% | 25.1% | 26.8% | 25.4% |
| Operating income | $101.7 million | $151.3 million | $431.2 million | $481.3 million |
| Operating margin | 4.4% | 5.6% | 5.9% | 6.1% |
| Net income attributable to Reliance | $51.4 million | $95.5 million | $242.9 million | $279.2 million |
| Diluted EPS | $0.69 | $1.21 | $3.21 | $3.55 |
- Cash flow: Nine-month cash from operations was $716.3 million, versus $162.8 million in 2014. Capital expenditures were $119.4 million; cash used in investing activities was $113.8 million.
- Liquidity and debt: September 30 cash was $94.1 million. Total debt was $2.1098 billion, down from $2.3191 billion at December 31, 2014. Reliance reported a 33.8% net debt-to-total capital ratio and $952.2 million available on its $1.5 billion revolving facility, after $489.0 million in borrowings and $58.8 million in letters of credit.
- Balance sheet: Total assets were $7.4556 billion and total equity was $3.9505 billion at September 30, 2015.
- Capital returns: The company repurchased $342.3 million of shares and paid $90.7 million in dividends and dividend equivalents during the first nine months. The quarterly dividend was $0.40 per share, up from $0.35 a year earlier.
Material changes versus the prior comparable period
- Q3 sales fell 15.5%; nine-month sales fell 7.0%. Same-store tons sold declined 4.1% and 2.3%, respectively, while same-store average selling prices fell 14.1% and 8.1%.
- Despite lower sales, gross profit margin improved to 27.9% in Q3 and 26.8% year to date. Management attributed the improvement to disciplined selling, value-added processing, inventory management and higher LIFO income. LIFO adjustments provided income of $35.0 million in Q3 and $75.0 million in the first nine months of 2015, compared with expenses of $20.0 million and $30.0 million in the corresponding 2014 periods.
- Operating income decreased 32.8% in Q3 and 10.4% year to date. Net income attributable to Reliance fell 46.2% and 13.0%, respectively.
- Cash from operations increased substantially, primarily from lower working-capital needs and inventory reductions. FIFO inventory was reduced by $239.8 million in the first nine months.
- Debt declined by approximately $209.1 million on a net basis during the first nine months. Financing cash outflows also reflected share repurchases and dividends.
Outlook, commentary, risks and unusual items
- Management said demand was relatively healthy in most end markets, with the significant exception of energy. Energy represented an estimated 8%–10% of sales; weak oil prices had reduced drilling activity and demand. Automotive and aerospace performed well; non-residential construction improved modestly, while agricultural equipment faced pressure.
- Management expected depressed oil prices to persist longer than previously anticipated. It recorded a $53.3 million impairment charge, including $17.7 million for property, plant and equipment associated with planned closures and $35.6 million for intangible assets affected by customer losses and lower profitability expectations. Further oil-price declines could lead to additional non-cash impairment charges.
- Management stated it expected adequate liquidity and operating flexibility, and anticipated continuing acquisitions and growth activities. The filing provides no specific earnings or revenue guidance.
- Debt obligations of $562.0 million were due before the revolving facility expires in April 2018. A $39.2 million lump-sum mortgage payment was due in October 2016. The company reported compliance with material debt covenants; its stated interest coverage ratio was 7.3 times against a 3.0-times minimum, and its credit-agreement leverage ratio was 35.4% against a 60% maximum.
- Environmental remediation obligations relate to former operations; insurance was expected to cover most remaining costs, and management did not expect a material adverse effect. Pending litigation was described as routine and not expected to have a material adverse effect.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures. It stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improved gross margin is sustainable given falling metals prices and the contribution from LIFO income.
- The pace of energy-market deterioration, planned business closures and any further impairment charges.
- Working-capital and inventory trends, including whether strong operating cash flow continues as inventory reductions moderate.
- Debt maturities and refinancing needs, particularly the 2016 note maturity and mortgage payment, alongside revolver availability and covenant headroom.
- The effects of ongoing share repurchases and higher dividends on liquidity and per-share results.
- Whether 2015 acquisition contributions and market mix changes materially affect comparisons; the filing reports sales from acquired businesses but does not provide a full organic-growth reconciliation.