Business Context and Reporting Period
Company: Reliance Steel & Aluminum Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Reliance is a leading metals service center, processing and distributing steel, aluminum, and other metals. The reporting period reflects the impact of a severe global economic recession, resulting in significantly reduced demand and pricing compared to the record-breaking levels seen in 2008.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Net Sales | $1,243,373 | $2,572,836 | $4,044,886 | $6,576,074 |
| Operating Income | $74,283 | $269,216 | $127,674 | $726,417 |
| Net Income (Attributable to Reliance) | $41,757 | $152,498 | $56,088 | $416,489 |
| Earnings Per Share (Diluted) | $0.57 | $2.07 | $0.76 | $5.65 |
| Cash Flow from Operations | N/A | N/A | $807,204 | $115,387 |
| Cash and Cash Equivalents | $87,864 | $43,682 | $87,864 | $43,682 |
| Total Debt (Long-term + Current) | $1,070,164 | $1,865,609 | $1,070,164 | $1,865,609 |
| Working Capital | $1,127,907 | $1,652,207 | $1,127,907 | $1,652,207 |
Note: Debt figures calculated as Current Maturities of Long-Term Debt + Long-Term Debt + Capital Lease Obligations.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 51.7% in the third quarter and 38.5% for the nine-month period compared to 2008. This was driven by a 26.4% drop in tons sold (Q3) and a 34.1% drop in average selling price per ton (Q3), attributed to the global recession and falling mill prices.
- Profitability Compression: Operating income margins fell from 10.5% to 6.0% in Q3 and from 11.0% to 3.2% for the nine-month period. While gross profit margins improved in Q3 (28.7% vs 24.3% in 2008) due to LIFO credits and inventory alignment, overall profitability was severely impacted by volume declines.
- Debt Reduction: Total debt decreased by approximately $795 million year-over-year. The company repaid over $1 billion of borrowings, including the full payoff of a $500 million senior unsecured term loan in September 2009.
- Record Operating Cash Flow: Despite lower earnings, cash flow from operations surged to $807.2 million for the nine months ended September 30, 2009, compared to $115.4 million in 2008. This was primarily due to a $266.5 million reduction in accounts receivable and a $709.9 million reduction in FIFO inventory levels.
- Workforce Reduction: The company reduced its workforce by approximately 1,600 employees (15.6%) during the nine-month period to align costs with lower demand.
Guidance, Outlook, and Risks
- Outlook: Management expects to improve margins on acquired PNA businesses as demand and pricing stabilize. Capital expenditures for 2009 were reduced to a budget of approximately $95 million (down from $210 million in 2008) to focus on key growth initiatives.
- Liquidity and Covenants: On September 28, 2009, the company amended its $1.1 billion revolving credit facility. Financial covenants were adjusted until June 30, 2010 (Interest Coverage reduced to 2.0x; Leverage Ratio increased to 50%). Restrictions were placed on acquisitions, dividends, and stock repurchases through June 30, 2010. The company remains in compliance with all covenants.
- Dividends: The company declared a fourth-quarter cash dividend of $0.10 per share, maintaining a 49-year streak of regular quarterly dividends.
- Risks: Primary risks include continued volatility in metal prices, further declines in customer demand due to the economic recession, and potential impairment of goodwill or intangible assets if market conditions deteriorate further. The company noted no indications of impairment as of September 30, 2009.
- Unusual Items: The company recorded a LIFO reserve credit of $67.5 million in Q3 2009 (compared to a $79.0 million charge in Q3 2008) due to declining inventory costs. Additionally, $16.3 million of customer receivables were written off as uncollectible in the nine-month period.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the specific terms of the September 2009 credit facility amendment and the timeline for the return to pre-amendment covenant levels (June 30, 2010).
- LIFO Reserve Impact: Assess the sustainability of the LIFO credit ($217.5 million for nine months) and its effect on reported earnings versus cash flow.
- Inventory Valuation: Review the adequacy of the allowance for doubtful accounts ($21.3 million) given the $16.3 million in write-offs and the economic environment.
- Goodwill Impairment: Monitor the upcoming annual goodwill impairment test (scheduled for November 1, 2009) given the significant drop in stock price and operating income.
- Same-Store Sales: Analyze the 53.0% decline in same-store sales for Q3 to understand the organic performance of the core business excluding the PNA acquisition.