Reliance Steel & Aluminum Co. — FY 2015 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Reliance operates a metals service-center network of more than 300 locations, distributing and processing metals for more than 125,000 customers. It has one reportable segment. The company filed audited financial statements with an unqualified audit opinion.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $9.35 billion | $10.45 billion |
| Gross profit / margin | $2.55 billion / 27.2% | $2.62 billion / 25.1% |
| Operating income / margin | $546.6 million / 5.8% | $617.4 million / 5.9% |
| Net income attributable to Reliance | $311.5 million | $371.5 million |
| Diluted EPS | $4.16 | $4.73 |
| Cash from operations | $1.025 billion | $356.0 million |
| Capital expenditures | $172.2 million | $190.4 million |
| Total debt at year-end | $1.942 billion | $2.319 billion |
Revenue fell 10.5%; tons sold declined 2.8%, while average selling price per ton declined 8.6%. Same-store tons were down 3.2%, versus a 7.5% industry decline reported by MSCI. Gross profit margin, a company-defined measure excluding associated depreciation and amortization, improved despite lower sales; management attributed this to disciplined pricing, quick-turn orders, value-added processing and inventory management. Operating income fell 11.5%, and Reliance-attributable net income fell 16.2%.
Fourth-quarter 2015 net sales were $2.026 billion, versus $2.577 billion in Q4 2014; net income attributable to Reliance was $68.6 million versus $92.3 million, and diluted EPS was $0.94 versus $1.18. Q4 gross profit was $582.0 million, compared with $622.3 million.
Cash from operations reached a record, primarily reflecting working-capital release: inventory declined by $433.1 million on a FIFO basis, and cash-flow statements show a $306.8 million inventory contribution and $222.5 million contribution from receivables. The company used cash to repay $376.6 million of net debt, repurchase $355.5 million of shares and pay $120.1 million in dividends. Year-end cash was $104.3 million; working capital was $1.565 billion. The $1.5 billion revolving facility had $1.11 billion available after borrowings and letters of credit. Net debt-to-total-capital was 31.8%, down from 34.9%; the company reported compliance with material debt covenants.
Material changes, outlook and risks
- Metal price pressure—especially on carbon and stainless steel—was driven by elevated imports, a strong U.S. dollar and weak global markets. Energy-market volumes fell approximately 41%, following lower oil prices and reduced drilling activity.
- Reliance recorded $53.3 million of long-lived-asset impairment and closure-related charges, primarily tied to energy businesses. Goodwill was not impaired. The 2015 income statement also included an $8.6 million litigation-settlement gain. LIFO inventory accounting produced a net $117.0 million credit to cost of sales, including a $69.1 million lower-of-cost-or-market charge; the net credit supported reported gross profit.
- Management expects continued near-term pressure from the energy downturn and metals pricing, but said non-energy demand was generally stable. It believes earnings capacity could improve if metals prices rise and non-residential construction improves; no specific earnings or sales guidance was provided.
- The 2016 capital-expenditure budget was approximately $180 million, including growth projects; estimated maintenance spending was $60–$80 million. On January 1, 2016, Reliance acquired Tubular Steel, Inc. (TSI), with approximately $200 million of 2014 sales, funded with revolver borrowings. Management reported pro forma net debt-to-total-capital of 35.1% and more than $800 million of remaining borrowing availability after the acquisition.
- Debt-related items to monitor include $350 million of senior notes maturing in November 2016 and a $39.2 million mortgage balloon payment due October 2016. Variable-rate debt was $801.7 million; a 100-basis-point rate increase would add approximately $8 million in annual interest expense, assuming debt remained constant.
- Other principal risks include metal-price and demand volatility, intense competition, customer-credit exposure, supplier availability, acquisition integration, environmental and regulatory obligations, international and currency risks, cybersecurity, and potential further impairment. The filing says existing environmental remediation costs are expected to be largely covered by insurance and not materially affect results. Routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether falling metals prices and imports continue to pressure realized selling prices, margins and inventory values, and how much of 2015 cash generation came from working-capital reductions.
- The sustainability of the reported gross-margin improvement, including the effect of the $117.0 million net LIFO credit and the $53.3 million impairment charge.
- Progress and funding plans for 2016 debt maturities and the mortgage balloon payment, alongside the TSI acquisition and planned capital expenditures.
- Whether energy-market weakness leads to further business closures, impairment charges or lower earnings, and whether non-residential construction and other end markets improve.
- Future dividend and repurchase decisions: 2015 dividends were $1.60 per share, and approximately 8.4 million shares remained authorized for repurchase at year-end; neither future dividends nor repurchases are guaranteed.