Reliance Steel & Aluminum Co. — Q3 2013 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Reliance distributes and processes metals. April’s acquisition of Metals USA added 46 service centers; its sales contributed $432.3 million in Q3 and $828.8 million year to date. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,443.5 million | $2,055.3 million | $6,917.1 million | $6,553.3 million |
| Operating income | $163.1 million | $152.6 million | $438.6 million | $523.4 million |
| Operating margin | 6.7% | 7.4% | 6.3% | 8.0% |
| Net income attributable to Reliance | $95.1 million | $98.1 million | $259.8 million | $323.1 million |
| Diluted EPS | $1.22 | $1.30 | $3.35 | $4.28 |
| Gross profit margin | 26.3% | 26.0% | 25.9% | 25.7% |
Cash flow and balance sheet: Nine-month operating cash flow was $513.0 million, versus $268.8 million in 2012; capital expenditures were $118.7 million. Acquisition spending was $796.8 million. Cash at September 30 was $104.9 million. Total debt was $2.15 billion, up from $1.21 billion at December 31, 2012; net debt-to-total capital was 34.9%, compared with 23.8% at year-end 2012. Current assets were $2.87 billion and current liabilities $713.7 million. The company reported $500 million outstanding on its $1.5 billion revolving facility and stated it was in compliance with debt covenants.
Receivables days were approximately 41.3, versus 42.1 at year-end 2012; inventory turnover was about 4.2 times for the nine-month period. Interest expense was $56.8 million for the first nine months, up from $44.2 million. Cash dividends paid were $71.4 million; the quarterly dividend had been raised to $0.33 per share.
Material changes versus prior periods
- Reported sales rose 18.9% in Q3 and 5.6% year to date, largely reflecting Metals USA. Same-store sales fell 3.2% in Q3 and 8.6% year to date. Same-store tons rose 3.1% in Q3 but declined 1.7% year to date.
- Average selling price per ton declined 9.5% in Q3 and 9.4% year to date overall; same-store prices fell 6.3% and 7.4%, respectively. Management cited lower mill pricing and below-normal demand.
- Q3 operating income increased 6.9%, but nine-month operating income declined 16.2%; Reliance-attributable net income fell 3.1% in Q3 and 19.6% year to date. Management attributed weaker year-to-date performance mainly to lower average selling prices and higher SG&A as a percentage of sales.
- Nine-month gross margin improved modestly, supported in part by a $37.5 million LIFO credit, compared with $27.0 million in 2012. Lower metal costs versus year-end 2012 drove the 2013 LIFO income.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected cash flow and revolving-credit capacity to be adequate for debt obligations, working capital, capital spending, growth needs and dividends; it anticipated continuing acquisitions and other growth activities.
- Management said business activity in almost all end markets improved steadily through 2013 versus the lower second half of 2012. Same-store Q3 tons increased 0.4% sequentially, which management described as atypical given seasonality. Metals pricing remained the principal challenge, with selling prices declining through 2013.
- Metals USA had a total transaction value of approximately $1.25 billion. The acquisition was financed with a term loan, $500 million of 4.50% senior notes due 2023, and revolving-credit borrowings. The company reported $11.4 million of transaction-related costs; MD&A also identifies $12.6 million of nonrecurring SG&A charges related to the acquisition and facility consolidation.
- Debt exposure increased, including variable-rate borrowing. The company reported $895.4 million of debt obligations due before the revolving facility expires in April 2018. A $39.2 million balloon payment on acquired Travel Main mortgages is due October 2016.
- Other risks include metal-price and demand fluctuations, competition, interest rates, foreign exchange, and seasonal variations. Goodwill and net intangible assets were $1.71 billion and $1.24 billion, respectively; impairment testing and recoverability depend on estimates. Environmental remediation obligations at former operations are expected to be largely covered by insurance, and management did not expect a material adverse impact. The filing reported no material change in previously disclosed risk factors.
- Subsequent to quarter-end, Reliance acquired Haskins Steel effective November 1, 2013; the purchase was funded with revolving-credit borrowings.
Important facts for investors to verify
- How much of reported growth and future earnings comes from Metals USA, and how effectively the acquisition is being integrated.
- Whether selling prices, same-store sales and margins stabilize, particularly given continued metal-price pressure and lower year-to-date operating income.
- Debt repayment plans, variable-rate exposure, covenant headroom, and the 2016 mortgage balloon payment alongside other maturities.
- The ongoing effects of acquisition-related costs, LIFO credits, purchase-price allocation and amortization on reported profitability.
- Goodwill and intangible-asset valuation, the outcome of impairment testing, and the status and insurance coverage of environmental contingencies.