Reliance Steel & Aluminum Co. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Reliance distributes and processes metals, including carbon steel, aluminum, stainless steel and alloys, and provides toll-processing and logistics services. Financial statements are unaudited.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,883.5 million | $2,988.9 million | $5,840.1 million | $5,746.0 million |
| Gross profit | $853.6 million | $917.5 million | $1,720.5 million | $1,737.4 million |
| Gross profit margin | 29.6% | 30.7% | 29.5% | 30.2% |
| Operating income | $266.6 million | $327.3 million | $547.4 million | $573.7 million |
| Net income attributable to Reliance | $183.1 million | $230.8 million | $373.2 million | $399.8 million |
| Diluted EPS | $2.69 | $3.16 | $5.49 | $5.46 |
- Cash flow: Six-month operating cash flow was $463.2 million, versus $97.0 million in 2018. Investing activities used $117.9 million, including $123.9 million of capital expenditures. Financing activities used $333.1 million, including $195.0 million of net debt repayments, $76.5 million of dividends and $50.0 million of share repurchases. Cash ended the period at $141.5 million.
- Debt and liquidity: Total debt was $2.019 billion at June 30, down from $2.214 billion at December 31, 2018. The company had $699.0 million available on its revolving credit facility, after $760.0 million drawn and $41.0 million of letters of credit. Net debt-to-total capital was 27.4%, versus 30.8% at year-end. The company reported compliance with financial covenants; interest coverage was 10.5x against a 3.0x minimum, and its covenant leverage ratio was 29.4% against a 60% maximum.
- Margins and working capital: Gross margins exceeded management’s estimated sustainable range of 27%–29%. Management cited strong operational execution, value-added processing and specialty products. Operating cash flow benefited from lower working-capital investment. Days sales outstanding were 42.4 days; inventory turnover was 4.3x, or 2.8 months on hand.
Changes and operating drivers
- Q2 sales declined 3.5% year over year, while first-half sales rose 1.6%. Q2 gross profit fell 7.0%; first-half gross profit fell 1.0%. Q2 diluted EPS declined 14.9%, while first-half diluted EPS increased 0.5%.
- Same-store tons sold declined 5.0% in Q2 and 5.5% in the first half; management said this outperformed reported industry shipment declines of 7.6% and 6.9%, respectively. Same-store average selling price per ton was nearly flat in Q2 (+0.2%) but higher in the first half (+6.2%).
- Management attributed weaker year-over-year comparisons partly to unusually strong 2018 demand and rising prices following Section 232 tariffs. Carbon steel mill-price decreases during Q2 weighed on prices. Automotive and aerospace demand remained strong; non-residential construction and heavy industry were relatively steady; energy demand softened.
- Q2 operating income declined 18.5%, primarily on lower gross profit from reduced tons sold and weaker gross margins; lower sales also raised SG&A as a percentage of sales. Six-month interest expense rose 18.0%, mainly due to higher rates on revolving-credit borrowings.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management said it would continue prioritizing working-capital management, profitability, growth initiatives and shareholder returns, and believed liquidity was sufficient for operating needs and planned capital allocation.
- The board declared a Q3 2019 dividend of $0.55 per share, payable September 6, 2019. The repurchase authorization had approximately 6.4 million shares remaining through December 31, 2021.
- Inventory accounting was a notable comparison factor: LIFO reserve adjustments produced credits of $22.5 million in Q2 and $35.0 million in the first half of 2019, versus charges of $62.5 million and $87.5 million in the comparable 2018 periods.
- The company adopted lease accounting effective January 1, 2019, recognizing $186.3 million of operating lease right-of-use assets and $187.1 million of lease liabilities at adoption; management reported no material impact on income, equity or cash flows. A $1.2 million long-lived asset impairment was recorded in 2019.
- Environmental remediation relates to former operations of a subsidiary; insurance has covered costs to date and is expected to cover most related costs. Management did not expect a material adverse effect. Other legal matters were described as routine, with no material adverse impact expected. No material changes to previously disclosed risk factors were reported.
- Key exposures include metal prices and availability, demand, interest rates, foreign exchange and economic conditions. Management noted seasonal effects from fewer shipping days around holidays and said quarterly results may not indicate full-year results. Goodwill was $1.874 billion and net intangible assets were $1.052 billion, making impairment judgments an important estimate.
Facts investors should verify
- Whether metal prices, product mix and shipment volumes sustain gross margins above the company’s 27%–29% estimated sustainable range.
- How much of the strong first-half operating cash flow reflects sustainable operations versus working-capital movements, and the pace of future debt reduction and capital spending.
- Effects of variable borrowing rates, upcoming debt maturities and covenant headroom; the filing identifies $126.2 million of debt obligations due before the revolving facility expires in September 2021.
- Potential sensitivity of goodwill and intangible-asset carrying values to changes in business conditions, and the status and insurance coverage of environmental remediation costs.
- Whether softer energy demand, changing metal prices and the post-tariff comparison period affect future volumes, selling prices and earnings.