Reliance Steel & Aluminum Co. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results compared with the same 2019 periods unless otherwise noted. The company distributes and processes metals across multiple end markets; management cited COVID-19 as a major factor affecting demand.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2.019 billion | $2.884 billion | $4.592 billion | $5.840 billion |
| Gross profit / margin | $614.7 million / 30.4% | $853.6 million / 29.6% | $1.395 billion / 30.4% | $1.721 billion / 29.5% |
| Operating income | $118.6 million | $266.6 million | $221.9 million | $547.4 million |
| Net income attributable to Reliance | $80.2 million | $183.1 million | $141.9 million | $373.2 million |
| Diluted EPS | $1.24 | $2.69 | $2.15 | $5.49 |
| Cash from operations | $475.7 million | $346.0 million | $646.5 million | $463.2 million |
- Q2 sales fell 30.0%; six-month sales fell 21.4%. Same-store tons sold declined 19.7% and 11.0%, respectively, while same-store selling prices per ton declined 12.4% and 12.0%.
- Q2 pretax income was $102.0 million versus $245.8 million; six-month pretax income was $185.1 million versus $501.3 million. Pretax margin was 5.1% in Q2 and 4.0% for the six months, versus 8.5% and 8.6%.
- Operating cash flow increased year over year, mainly reflecting reduced working-capital investment despite lower earnings. Q2 free cash flow, defined by management as operating cash flow less capital expenditures, was $434.7 million.
- At June 30, cash was $222.7 million and total debt was approximately $1.498 billion, compared with $174.3 million and $1.596 billion at year-end 2019. Net debt-to-total capital was 20.4%, down from 21.4%.
- Available borrowing capacity on the revolving facility was $1.16 billion, with $300 million borrowed and $37.5 million of letters of credit issued. The company reported compliance with its debt covenants.
- Current assets were $2.727 billion and current liabilities $642.0 million. The quarterly dividend was $0.625 per share; the company declared the same amount for Q3 after the quarter.
Material changes and unusual items
- Six-month results included $143.1 million in impairment and restructuring charges, including a $39.8 million inventory provision, $89.0 million of intangible-asset impairment and other asset impairment and restructuring costs. These charges reduced six-month diluted EPS by $1.64, according to management.
- The first-quarter charges followed the decision to close three energy-related businesses and reduce the long-term outlook for certain remaining energy operations amid lower crude prices and weaker expected demand. Q2 included $5.6 million of impairment and restructuring charges, mainly associated with COVID-19-related downsizing.
- Management reported same-store SG&A expense down 18.3% in Q2 and 10.6% for the six months, reflecting workforce actions and lower incentive compensation. SG&A as a share of sales nevertheless rose to 21.7% and 20.9%, respectively, as sales declined.
- The company repurchased $300 million of shares in the first half (about 3.3 million shares); none were repurchased in Q2. Six-month dividends and dividend equivalents paid were $81.8 million.
- Reliance purchased the remaining 49% interest in Feralloy Processing Company for $8.0 million, increasing ownership to 100%. Fry Steel, acquired at year-end 2019, contributed $43.8 million in first-half sales.
Outlook, management commentary and risks
- Management expected overall demand in Q3 2020 to improve slightly from Q2 based on then-current trends; this was not formal full-year earnings guidance. Daily tons sold rose 3.4% from April to May and 0.2% from May to June after falling 17.4% from March to April.
- Management described demand weakness across most end markets due to COVID-19, with particular pressure in automotive, oil and gas, and commercial aerospace. Automotive production began ramping up in late June; defense aerospace remained relatively stable. Two smaller international commercial-aerospace operations were closed.
- The company reduced its 2020 capital expenditure budget from approximately $250 million to $190 million, paused non-essential spending and focused on cash preservation and inventory management. Management stated liquidity should support operations, debt service, investment, dividends and opportunistic repurchases, while noting that pandemic effects could not be reliably estimated.
- Risks include further demand deterioration, facility slowdowns or closures, supply-chain disruption, commodity-price volatility, reduced access to financing, and additional impairment charges. Goodwill was $1.924 billion and other intangible assets net were $974.3 million at quarter-end; impairment measurements depend on significant estimates and assumptions.
- Management said routine legal matters and an environmental remediation obligation were not expected to have a material adverse impact; insurance was expected to cover the majority of remediation costs incurred. The filing reported no material changes to capital expenditure or purchase commitments.
Important facts for investors to verify
- Whether Q3 demand improved as anticipated and whether COVID-19 disruption, particularly in energy, automotive and commercial aerospace, led to further sales or margin pressure.
- Whether the energy-related closures and revised outlook, along with the assumptions used in impairment testing, result in additional charges.
- Whether working-capital cash generation is sustainable as sales and inventory levels change, and whether the lower capital expenditure plan affects future growth investment.
- Debt maturities and refinancing needs: the filing reported $65.2 million of debt obligations due before the revolving facility expires September 30, 2021.
- Whether the company can maintain its dividend and capital-return plans if operating cash flow weakens; the Q2 filing’s cash-flow statement presents six-month figures, while Q2 cash flow and free cash flow are management-reported measures.