Reliance Steel & Aluminum Co. — Q1 2011 Form 10-Q
Business context and reporting period
Reliance distributes and processes metals. This unaudited filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010; balance-sheet comparisons are with December 31, 2010. The company noted that quarterly results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $1,912.7 million | $1,454.1 million; up 31.5% |
| Gross profit and margin | $506.3 million; 26.5% | $378.1 million; 26.0% |
| Operating income and margin | $154.8 million; 8.1% | $79.8 million; 5.5% |
| Net income attributable to Reliance | $92.3 million | $44.7 million |
| Diluted EPS | $1.23 | $0.60 |
| Net cash used in operating activities | $101.4 million | $54.3 million |
| Capital expenditures | $35.8 million | $23.1 million |
| Cash and cash equivalents at period end | $76.8 million | $72.9 million at December 31, 2010 |
| Total debt | $1,089.1 million | $943.1 million at December 31, 2010 |
Gross profit and gross margin are company-defined non-GAAP measures that exclude depreciation and amortization associated with sales. The current ratio was approximately 3.0 at March 31, 2011, based on current assets of $2,116.3 million and current liabilities of $695.6 million. Net debt-to-total capital was 25.7%, versus 23.5% at year-end 2010.
Material changes and drivers
- Sales increased 31.5%, reflecting a 12.3% increase in tons sold and a 17.6% increase in average selling price per ton. Same-store sales rose 29.4%; same-store tons sold increased 10.8% and average selling price per ton rose 17.3%.
- Management attributed higher selling prices to mill price increases, primarily reflecting higher scrap and other mill input costs. Customer purchasing ahead of announced price increases supported first-quarter demand. Non-residential construction, the company’s largest end market, remained comparatively weak, though management reported some localized improvement.
- Gross margin increased 0.5 percentage points, while SG&A fell to 16.7% of sales from 18.5%; operating margin rose to 8.1% from 5.5%. The company cited improved pricing and volume, with expenses increasing more slowly than sales.
- Q1 2011 LIFO expense was $20.0 million, compared with $5.0 million in Q1 2010. Receivables and inventory increased with sales, prices, and working-capital needs, contributing to greater operating cash use; accounts payable partly offset the increase.
- Debt increased by approximately $146 million from year-end, principally as the company funded working capital. The company issued 94,181 shares through option exercises and paid $9.0 million in dividends.
Outlook, commentary, risks, and contingencies
- Management estimated a full-year 2011 LIFO charge of $80 million, assuming stable to lower overall pricing and year-end inventory quantities below March 31 levels for many products.
- Capital expenditures were budgeted at approximately $200 million for 2011, including facility purchases, construction, expansion, and growth projects. Management expected adequate cash flow and revolving-credit capacity to meet debt, working-capital, capital-spending, and growth needs, and anticipated continued acquisition and other growth activity.
- The company declared a regular quarterly dividend of $0.12 per share, a 20% increase; it reported 52 consecutive years of regular quarterly dividends.
- At March 31, the $1.1 billion revolving facility had $341.0 million drawn and $43.6 million of letters of credit outstanding. The company was compliant with debt covenants: interest coverage was approximately 7.0 times against a 3.0-times minimum, and leverage was 27.9% against a 60% maximum. Debt obligations of $97.4 million were due before the facility’s November 2012 expiration.
- Environmental remediation obligations relate to former EMJ manufacturing operations. Potential costs could be significant, but insurance was expected to cover the majority; the company did not expect a material adverse effect.
- Goodwill was $1.11 billion and net intangible assets were $749.4 million. No impairment indicators were noted at March 31; goodwill represented 21.8% of total assets. Market risks included interest rates, economic conditions, foreign exchange, metal prices, demand, and availability; the company reported no significant change in these risks or in previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and volumes remain resilient if metal-price increases or customer advance buying abate, particularly given weakness in non-residential construction.
- Actual full-year LIFO expense versus the $80 million estimate and its effect on gross margin.
- Working-capital conversion and operating cash flow, including inventory levels, receivables, and payables.
- Progress on the $200 million capital-spending plan, acquisition activity, and resulting debt and liquidity needs.
- Refinancing or repayment plans for near-term maturities and the revolving facility’s November 2012 expiration.
- Developments in environmental remediation costs and insurance recovery, as well as future goodwill and intangible-asset impairment assessments.