Reliance Steel & Aluminum Co. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company distributes and processes metals through a broad network of businesses and serves diverse end markets. Financial results are unaudited and compared with Q1 2015 unless noted.
Key financial results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $2,162.7 million | $2,614.4 million; down 17.3% |
| Net income attributable to Reliance | $92.2 million | $101.3 million; down 9.0% |
| Diluted EPS | $1.27 | $1.30 |
| Gross profit / margin | $636.7 million / 29.4% | $670.7 million / 25.7% |
| Operating income / margin | $129.8 million / 6.0% | $169.3 million / 6.5% |
| Operating cash flow | $155.4 million | $171.4 million |
| Capital expenditures | $34.4 million | $31.3 million |
Gross profit margin is a company-presented non-GAAP measure that excludes depreciation and amortization associated with sales. Management also described the 29.4% result as its FIFO gross profit margin.
- Sales drivers: Tons sold fell 2.7% overall and 3.7% on a same-store basis; average selling price per ton fell 15.6% overall and 15.9% same-store. Lower metal prices, particularly for carbon and stainless steel, drove most of the sales decline. Energy-market demand was notably weak.
- Margins and costs: Gross margin improved from 25.7% to 29.4%, the fifth consecutive quarterly increase, while gross profit dollars fell 5.1%. Same-store selling, general and administrative expense declined 1.0%, but its share of sales rose to 20.7% from 17.1% as revenue per ton weakened.
- Cash and liquidity: Cash was $120.5 million at March 31, 2016, versus $104.3 million at year-end 2015. Current assets were $2,739.9 million and current liabilities $1,071.4 million. The company reported $887.1 million available on its $1.5 billion revolving facility after $556.0 million of borrowings and $56.9 million of letters of credit.
- Debt and capital: Total debt was $2,146.6 million, up from $1,942.1 million at December 31, 2015. Net debt-to-total capital rose to 33.4% from 31.8%, primarily to fund Tubular Steel. The company reported compliance with material debt covenants; its interest coverage ratio was 6.5 times against a 3.0-times minimum.
- Cash deployment: Investing cash outflow was $331.5 million, including $290.9 million for the Tubular Steel acquisition. Financing cash inflow was $189.7 million. The quarterly dividend was $0.40 per share; no shares were repurchased in Q1 2016.
Material changes and unusual items
- On January 1, 2016, Reliance acquired Tubular Steel for approximately $291.1 million net assets acquired, funded with revolving-credit borrowings. Tubular Steel contributed approximately $29.8 million in Q1 sales. Its purchase-price allocation remained preliminary, including $96.0 million of goodwill.
- On April 1, 2016, after quarter-end, Reliance acquired Best Manufacturing; its 2015 sales were approximately $20.0 million. The purchase was funded with revolving-credit borrowings.
- The effective tax rate was 14.4%, versus 31.7% in Q1 2015. Resolution-related remeasurement of a previously uncertain tax position lowered the 2016 rate by 16.1 percentage points; management said this benefit was not expected to recur. If full-year taxable income continued at the Q1 rate, management estimated an annual effective tax rate of approximately 27%.
- Foreign-currency translation contributed $15.7 million of other comprehensive income, compared with a $24.9 million translation loss in Q1 2015. Q1 2016 had no incremental LIFO expense or income, compared with a $7.5 million LIFO credit in Q1 2015.
Outlook, risks and contingencies
Management reported rising mill prices for many carbon and stainless products late in Q1, which it attributed to U.S. steel trade-case filings, and anticipated a more meaningful effect on selling prices in Q2 as higher prices moved through the market. It cited relatively stable demand outside energy, ongoing gradual improvement in non-residential construction, and stronger automotive and aerospace activity. No specific revenue or earnings guidance was provided.
Management emphasized disciplined sales, value-added processing, quick-turn orders, inventory management and working-capital control. It said stronger metal pricing and improvement in non-residential construction could support higher earnings capacity. Risks include metal-price and demand changes, especially continued weakness in energy, interest rates, foreign exchange and broader economic conditions. A $350.0 million senior-note maturity is due in November 2016; a separate $39.2 million mortgage lump-sum payment is due in October 2016. Management stated it expected sufficient liquidity to meet obligations and fund growth. Environmental remediation at former EMJ operations is expected to be largely covered by insurance; the company did not expect a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes in contractual obligations.
Important facts for investors to verify
- Whether metal-price increases anticipated for Q2 translated into higher realized selling prices and sustained gross margins.
- Whether volume and demand, particularly in energy and non-residential construction, improved or weakened after quarter-end.
- The final Tubular Steel purchase-price allocation, integration performance, and financial contribution from both acquisitions.
- How the November 2016 notes and October mortgage payment were refinanced or repaid, and subsequent debt, leverage and revolver availability.
- The tax-rate impact after the nonrecurring 16.1-percentage-point benefit, alongside the company’s stated approximately 27% full-year scenario estimate.