Reliance Steel & Aluminum Co. — Q2 2010 Form 10-Q
Business context and period: The company distributes and processes metals. This unaudited filing covers the quarter and six months ended June 30, 2010, compared with the same 2009 periods. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,620.6 | $1,243.0 | $3,074.7 | $2,801.5 |
| Gross profit / margin | $416.8 / 25.7% | $282.9 / 22.8% | $794.9 / 25.9% | $637.3 / 22.7% |
| Operating income / margin | $114.6 / 7.1% | $5.4 / 0.4% | $194.4 / 6.3% | $53.4 / 1.9% |
| Net income attributable to Reliance | $61.6 | ($5.8) | $106.2 | $14.3 |
| Diluted EPS | $0.83 | ($0.08) | $1.43 | $0.19 |
| Operating cash flow | Not separately stated | Not separately stated | ($35.5) | $681.3 |
- Q2 sales rose 30.4%; tons sold increased 9.0% and average selling price per ton 18.9%. For the first half, sales grew 9.7%, with tons up 3.0% and average price per ton up 5.8%.
- Gross margin recovery reflected improved demand and pricing, better alignment of inventory costs with replacement costs, and a more favorable product mix. Carbon steel was 52% of sales in both 2010 comparison periods, versus 57% in Q2 2009 and 58% in the first half of 2009.
- S,G&A expense increased 9.8% in Q2 and 3.2% for the first half, but fell as a percentage of sales. Management attributed most of the expense increase to higher incentive compensation as profitability improved.
Financial position and liquidity
- At June 30, cash was $47.4; current assets were $1,722.3 and current liabilities $538.5. Working capital was $1.18 billion, up $210.5 million from year-end.
- Total debt was $1,012.3, versus $937.7 at December 31, 2009; long-term debt was $923.4. Net debt-to-total capital was 26.1%, compared with 25.6% at year-end and 30.7% at June 30, 2009.
- The $1.1 billion revolving facility had $189.0 million drawn at quarter-end. The company reported covenant compliance; interest coverage was about 6.4x against a 3.0x minimum, and leverage was 28.0% against a 60% maximum.
- Operating cash flow was negative as higher receivables and inventory absorbed cash. Receivables increased $202.9 million and FIFO inventory increased $192.4 million, partly offset by a $123.7 million rise in accounts payable and accrued expenses. Inventory turns improved to about 4.8x from 3.4x in the prior-year first half.
- First-half capital expenditures were $39.4 million. Cash dividends paid were $14.8 million; the quarterly dividend remained $0.10 per share.
Material changes, outlook, and risks
- Management said demand had gradually improved from the June 2009 low, as customers bought metal to meet production needs. It expected continued pressure on metal pricing in the second half of 2010 relative to Q2 levels, but characterized volatility as manageable versus the rapid 2009 declines. Carbon steel prices rose through most of the first half, then eased late in Q2; stainless steel and aluminum prices also began declining in Q2.
- Management budgeted approximately $140 million of 2010 capital expenditures, including growth projects, and anticipated continuing acquisition and other growth activities. It said it expected adequate cash flow and revolving-credit capacity to meet debt, working-capital, capital-expenditure, and growth needs.
- A $78 million private-placement note maturity was due October 15, 2010; the company reported $147.7 million of debt obligations due before the revolving facility expires in November 2012.
- The Q2 LIFO adjustment was a $10 million expense, versus a $75 million credit in Q2 2009; first-half adjustment was a $15 million expense, versus a $150 million credit. Management estimated a $30 million full-year 2010 LIFO charge, despite a reported $36.1 million actual calculation through the first half, citing expected price and inventory reductions.
- Environmental remediation at former EMJ manufacturing sites could involve significant cleanup costs, but insurance was expected to cover most costs; management did not expect a material adverse impact. No impairment indicators were reported at June 30, although goodwill and intangible assets were substantial: $1.08 billion and $711.9 million, respectively.
- The company adopted updated variable-interest-entity accounting on January 1, 2010, consolidating one joint venture; management said the impact was not material. No material changes to reported risk factors or market-risk exposures were disclosed. Management considered disclosure controls effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether second-half metal pricing and demand develop as management expected, and how that affects gross margins and inventory values.
- Whether operating cash flow improves as working capital needs evolve; first-half cash use contrasts with strong prior-year cash generation.
- The October 2010 note repayment/refinancing and the company’s stated ability to fund upcoming maturities and planned growth.
- The basis for the full-year $30 million LIFO charge estimate versus the $36.1 million calculation reported through June, and the effects of subsequent inventory and price changes.
- Any developments in environmental remediation, goodwill or intangible-asset impairment assessments, and compliance with debt covenants.