Reliance Steel & Aluminum Co. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet amounts are as of March 31, 2015. Financial amounts below are in millions of dollars unless otherwise noted.
Business context and results
Reliance distributes and processes metals across multiple end markets. Management reported solid operating performance despite declining metals prices. Acquisitions completed in 2014 contributed to reported sales growth; same-store volumes were essentially flat. Demand improved in most end markets, while oil-and-gas demand weakened amid lower oil prices.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2,614.4 | $2,553.0 | +2.4% |
| Gross profit / margin | $670.7 / 25.7% | $647.2 / 25.4% | +$23.5; +0.3 percentage points |
| Operating income / margin | $169.3 / 6.5% | $154.3 / 6.0% | +$15.0 |
| Net income attributable to Reliance | $101.3 | $87.2 | +16.2% |
| Diluted EPS | $1.30 | $1.11 | +$0.19 |
| Operating cash flow | $171.4 | $68.8 | +$102.6 |
Cash flow, liquidity and debt
- Cash and cash equivalents were $101.6 at quarter-end, versus $106.2 at December 31, 2014. Operating cash flow was $171.4; investing cash outflow was $27.2, including $31.3 of capital expenditures; financing cash outflow was $146.0. Cash decreased $4.6 during the quarter.
- Total debt was $2,371.5, up from $2,319.1 at year-end; long-term debt was $2,268.5. Net debt-to-total capital was 36.3%, compared with 35.0% at December 31, 2014.
- The $1.5 billion revolving credit facility had $734.0 outstanding, $58.9 of letters of credit and $707.1 available. The company said it was in compliance with material debt covenants. The reported interest coverage ratio was 7.6x versus a 3.0x minimum; the covenant leverage ratio was 37.8% versus a 60% maximum.
- Inventory was $1,803.3, up from $1,752.1 at year-end. Inventory turns were approximately 3.9x for the quarter, versus a 4.1x 2014 annual rate. Days sales outstanding were approximately 41.7 days.
Material changes and notable items
- Same-store sales declined 1.1%, same-store tons sold declined 0.1%, and same-store average selling price fell 1.7% year over year. Management attributed total sales growth mainly to acquisitions; overall tons sold rose 0.8%.
- Lower metals costs generated $7.5 of LIFO income in Q1 2015, compared with $5.0 of LIFO expense in Q1 2014. Management said this helped lift gross margin, which remained within its historical 25%–27% range.
- Q1 2014 included a $10.3 non-recurring antitrust-litigation charge in SG&A. This makes the year-over-year improvement in operating results less comparable.
- The effective tax rate was 31.7%, down from 34.5%, contributing to higher net income.
- The company repurchased 3.19 million shares in March at an average $58.02 per share; reported repurchases were $184.9, including shares pending settlement. Cash-flow statements show $171.2 of repurchases that settled during the quarter. The company also repurchased $15.1 in April. The quarterly dividend increased from $0.35 to $0.40 per share.
- Foreign-currency translation produced a $24.9 other comprehensive loss, reducing comprehensive income attributable to Reliance to $76.5 from $78.4.
Outlook, risks and contingencies
Management expected metals prices to continue declining in Q2 2015, potentially pressuring margins and earnings, given historically high import levels and a strong U.S. dollar. It expected to reduce inventories and improve inventory turns during 2015, and anticipated strong operating cash flow for the rest of the year to support acquisitions, internal investment, dividends and opportunistic repurchases. These are forward-looking expectations, not guarantees; the filing gives no specific earnings or revenue guidance.
Key exposures include metals pricing and availability, demand and economic conditions, competition, foreign exchange and interest rates. Energy-market sales were estimated at 8%–10% of total sales and were affected by weak oil prices. Environmental remediation obligations at former EMJ operations could involve significant costs, but insurance was expected to cover most costs incurred and management did not expect a material adverse effect. Other litigation was described as routine and not expected to materially affect results or financial condition. No material risk-factor changes or significant market-risk changes were reported.
Debt maturities before the revolving facility expires in April 2018 totaled $578.7. A $39.2 mortgage balloon payment is due in October 2016. Goodwill and net intangible assets were $1,730.3 and $1,220.2, respectively; the filing identifies impairment assessments and related estimates as areas requiring management judgment.
Important facts for investors to verify
- Whether declining metals prices and imports continue to pressure selling prices, margins and earnings after Q1.
- Whether inventory reduction and improved turns materialize, and how working-capital needs affect cash generation.
- How much reported growth and profitability reflect acquisitions, product mix and the Q1 LIFO benefit, versus underlying same-store performance.
- Debt maturities, leverage, covenant headroom, and the pace of dividends and share repurchases relative to operating cash flow.
- Developments in environmental matters, routine litigation and impairment assessments for goodwill and intangible assets.