Reliance Steel & Aluminum Co. — Q2 2014 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2014. Reliance distributes and processes metals through service centers. Comparisons with 2013 are affected by the April 2013 acquisition of Metals USA; the company also reports same-store measures excluding 2013 acquisitions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,616.8 million | $2,448.3 million | $5,169.8 million | $4,473.6 million |
| Operating income | $175.7 million | $145.5 million | $330.0 million | $275.5 million |
| Net income attributable to Reliance | $96.5 million | $81.0 million | $183.7 million | $164.7 million |
| Diluted earnings per share | $1.22 | $1.05 | $2.34 | $2.13 |
- Q2 sales rose 6.9%, operating income 20.8%, and Reliance-attributable net income 19.1% year over year. Six-month sales rose 15.6%, operating income 19.8%, and attributable net income 11.5%.
- Q2 sales increased 8.2% by tons while average selling price per ton declined 0.9%; same-store tons rose 4.6%. For the six months, total tons rose 21.5% and same-store tons rose 6.5%; average selling price per ton fell 4.5% overall.
- Gross profit margin, as presented by the company excluding associated depreciation and amortization, was 25.7% in Q2 versus 25.4%; for the six months it was 25.5% versus 25.7%. Operating margin was 6.7% versus 5.9% in Q2 and 6.4% versus 6.2% for the six months.
- Cash from operations was $109.5 million for the six months, down from $283.9 million. Receivables and inventory consumed cash as working capital increased; inventory also reflected improving demand and pricing. Capital expenditures were $86.9 million, compared with $74.3 million.
- At June 30, cash was $113.5 million; current assets were $3,155.4 million and current liabilities $762.5 million. Total debt was $2,135.5 million, versus $2,112.3 million at year-end 2013. Net debt-to-capital was 33.3%, down from 34.3%. The $1.5 billion revolving facility had $520 million drawn; $59.2 million of letters of credit were outstanding.
- Six-month dividends paid were $54.4 million, versus $46.0 million; the quarterly dividend was raised from $0.30 to $0.35 per share. A further $0.35 dividend was declared for Q3, payable September 12, 2014.
Changes, outlook and risks
- Management attributed higher reported sales and earnings largely to the Metals USA acquisition, alongside improved same-store demand and expense leverage. Metals USA contributed $918.6 million of six-month 2014 sales. Management said Q2 sales were a company record.
- Management reported continuing, gradual improvement in U.S. industrial markets and stronger activity in auto, aerospace and energy. Non-residential construction improved modestly but remained well below 2006 peak levels. Metals pricing rose from Q1 but remained below prior-year levels for most products; imports and metal-price volatility contributed to competitive pricing conditions.
- No numerical earnings or revenue guidance was provided. Management said improved demand, particularly in non-residential construction, and higher metals prices could support meaningfully higher earnings. Its stated priorities include working-capital management, profitability, acquisitions and internal investment.
- The sale of Metals USA’s non-core roofing business generated $26.2 million net proceeds and a $1.1 million pretax loss; the associated taxable gain raised the effective tax rate. Q2 and six-month effective tax rates were 36.6% and 35.6%, versus 33.3% and 31.4% a year earlier.
- Antitrust litigation: A judgment against Reliance, its subsidiary and co-defendants was reduced to $153.5 million and is stayed pending appeal. Reliance estimated its potential loss at $10.0–$38.4 million and recorded the $10.0 million minimum; the ultimate obligation could differ materially. Management also cited $11.5 million of six-month antitrust-related charges in SG&A.
- Environmental remediation at former operations is expected to be mostly covered by insurance; the company did not expect a material adverse impact. It reported compliance with debt covenants and no material changes to previously disclosed risk factors or market-risk exposures. Management stated disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth reflects Metals USA and other acquisitions versus underlying same-store demand, volume and pricing.
- Whether working-capital investment continues to constrain operating cash flow, and whether inventory and receivables convert to cash as expected.
- Developments in the antitrust appeal, the eventual allocation of any judgment among defendants, and potential exposure relative to the recorded liability.
- Debt maturities and refinancing needs, including $556.7 million of obligations due before the revolving facility expires in April 2018; confirm continued covenant compliance.
- Whether metals prices, imports and demand—especially in non-residential construction—support margins and management’s stated earnings potential.