Reliance Steel Beats Q3 Earnings, Net Down

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Reliance Steel & Aluminum Co. (RS) saw lower profit in the third quarter of 2013 as decline in metals' prices coupled with higher costs weighed on its bottom line. The California-based metals processor’s profit fell roughly 3% year over year to $95.1 million or $1.22 per share in the quarter from $98.1 million or $1.30 per share a year ago. But it beat the Zacks Consensus Estimate by a couple of cents.
 
In addition to weak pricing, Reliance Steel also saw its costs jump around 20% year over year in the reported quarter, contributing to the lower profit. The company recorded an inventory adjustment related credit of $27.5 million (included in cost of sales) in the reported quarter.
 
Revenues, Volume and Pricing
 
Revenues went up roughly 19% year over year to $2,443.5 million in the reported quarter, but missed the Zacks Consensus Estimate of $2,519 million. Strength across automotive, aerospace, energy and heavy equipment was partly ebbed by sustained weakness in the non-residential construction market.
 
The acquisition of Metals USA (completed in Apr 2013) also contributed to the sales gain. Metals USA, which makes steel and aluminum components, is a strategic fit with Reliance Steel’s portfolio and complements its existing customer base, product mix and geographic footprint.
 
Sales volume climbed 31.3% year over year in the quarter. Average prices per ton slipped 9.5% year over year and 2.3% sequentially. Price decline was seen across all products with carbon and stainless steel price falling 7.1% and 13.7%, respectively.
 
Financial Health
 
Reliance Steel ended the quarter with cash and cash equivalents of $104.9 million, down 13% year over year. Total debt increased roughly 57% year over year to around $2.2 billion at the end of the quarter. Reliance Steel repaid $183.1 million of debt during the quarter. Net debt-to-capital ratio was 34.9% as at the end of the reported quarter, up from 26.4% a year ago.
 
Reliance Steel, in Jul 23, raised in its quarterly dividend by 10% to 33 cents per share. The company generated operating cash flows of $229.1 million in the quarter, down roughly 7% year over year.
 
Outlook
 
Looking ahead, Reliance Steel expects the uncertain economic and political global environment to continue to affect the steel industry in the fourth quarter. Moreover, lower shipping days given the holiday season and closure at many of its customers' facilities due to the holidays are expected to hurt sales volume in the quarter, leading to a sequential decline in tons sold.   
 
Overall pricing is expected to remain near the current low levels for the balance of 2013. The company expects earnings per share for the fourth quarter to be in the range of 90 cents to $1.00.
 
Reliance Steel, a Zacks Rank #3 (Hold) stock, remains challenged by weak steel industry fundamentals and contends with soft steel and metals pricing environment. In addition, raw material prices are expected to remain volatile. Non-residential construction, Reliance Steel’s largest end market, still remains weak.
 
Other metals companies having favorable Zacks Rank are NSK Ltd. (NPSKY), Timken Co. (TKR) and Norsk Hydro ASA (NHYDY). While NSK holds a Zacks Rank #1 (Strong Buy), both Timken and Norsk Hydro retain a Zacks Rank #2 (Buy).
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