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Reliance Steel & Aluminum Co. (RS - Analyst Report) saw its profit slide in the second quarter of 2013 as weak demand stemming from economic uncertainty and lower pricing dented its bottom line. The California-based metals processor’s profit tumbled roughly 26% year over year to $81 million or $1.05 per share in the quarter.

In addition to weak demand and pricing, Reliance Steel also saw its costs rise 14% year over year in the quarter, contributing to the slump in profit.

Excluding one-time charges, earnings per share were $1.14, missing the Zacks Consensus Estimate of $1.18 and falling below the year-ago earnings of $1.44 per share. Reliance Steel recorded an inventory adjustment related credit of $5 million (included in cost of sales) in the reported quarter.

Revenues, Volume and Pricing

Revenues rose 11% year over year to $2,448.3 million in the reported quarter, but trailed the Zacks Consensus Estimate of $2,463 million. Strength across automotive, energy and heavy equipment was partly ebbed by sluggishness in the non-residential construction market.

Sales volume jumped 24.2% year over year and 28.7% sequentially in the quarter. Average prices per ton slipped 10.9% year over year and 6.2% sequentially. Price decline was witnessed across all products with carbon and stainless steel price falling 10.5% and 14%, respectively.

Financial Health

Reliance Steel ended the quarter with cash and cash equivalents of $100.8 million, up 8% year over year. Total debt increased roughly 52% year over year to roughly $2.3 billion at the end of the quarter, down 20% from a year ago. Net debt-to-capital ratio was 37.6% as of Jun 30, 2013, up from 30% as of Jun 30, 2012.

During the reported quarter, Reliance Steel amended $1.5 billion unsecured revolving credit facility and obtained a new term loan worth $500 million. It also sold $500 million of its 4.5% senior notes.

Reliance Steel’s Board, on July 23, approved a 10% rise in its quarterly dividend to 33 cents per share. The revised dividend is payable on Sep 13, 2013, to shareholders of record as of Aug 16, 2013.

Recent Acquisitions

Reliance Steel continues its aggressive acquisition strategy to incite growth. It wrapped up its acquisition of Metals USA Holdings Corp in Apr 2013 following the approval of the transaction by Metals USA’s shareholders. 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.
 
Outlook

Looking ahead, Reliance Steel expects the uncertain economic environment to continue to affect the steel industry in the third quarter. The company envisions a modest recovery in demand while sees pricing environment to be similar as witnessed in the second quarter.

Reliance Steel expects to earn $1.15 to $1.25 per share in the third quarter, which is below the current Zacks Consensus Estimate of $1.30. It expects seasonal slowness to impact business activity in the quarter.

Our View

Reliance Steel, a Zacks Rank #4 (Sell) 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.

The steel industry remains affected by overcapacity that continues to outpace demand. There is not enough demand for steel products due to weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.

We also remain concerned about a still weak non-residential construction market, Reliance Steel’s largest end market.

Other companies in the metals industry having a favorable Zacks Rank are NSK Ltd. (NPSKY), Horsehead Holding Corp. (ZINC - Snapshot Report) and Precision Castparts Corp. (PCP - Analyst Report). While NSK holds a Zacks Rank #1 (Strong Buy), both Horsehead Holding and Precision Castparts retain a Zacks Rank #2 (Buy).

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