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Reliance Steel & Aluminum Co.’s (RS - Analyst Report) profit sagged in the fourth quarter of 2013 as lower pricing and higher costs dragged down its bottom line. The California-based metals processor’s profit fell roughly 23% year over year to $61.8 million or 79 cents per share in the quarter from $80.4 million or $1.06 per share a year ago.

Barring one-time items such as impairment and restructuring charges, earnings were 92 cents per share, down from $1.08 per share a year ago. It missed the Zacks Consensus Estimate by 6 cents.

Reliance Steel saw its consolidated costs jump around 25% year over year in the reported quarter, contributing to the lower profit. The company also witnessed a seasonal slowdown in demand during the quarter. It recorded an inventory adjustment related credit of $12.7 million (included in cost of sales) in the quarter.

For full-year 2013, profit, as reported, slipped around 20% year over year to $321.6 million or $4.14 per share. Adjusted earnings fell to $4.40 per share from $5.35 per share a year ago, but beat the Zacks Consensus Estimate by a nickel.

Revenues, Volume and Pricing
 
Revenues shot up roughly 22% year over year to $2,306.7 million in the reported quarter, but missed the Zacks Consensus Estimate of $2,375 million. Strength in the automotive market coupled with Metals USA acquisition supported the top line. 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.
 
Overall sales volume jumped around 39% year over year in the quarter while same-store sales volumes moved up 9.5%. Average prices per ton fell around 11% year over year and 2% sequentially.

For the full year, revenues rose roughly 9% year over year to $9,223.8 million, but missed the Zacks Consensus Estimate of $9,299 million.          
 
Financials
 
Reliance Steel ended 2013 with cash and cash equivalents of $83.6 million, down 14% year over year. Total debt increased roughly 75% year over year to around $2.1 billion at the end of the year. Reliance Steel repaid $43.5 million of debt during the quarter. Net debt-to-capital ratio was 34.3% as at the end of the reported quarter, up from 23.8% a year ago.
 
Reliance Steel’s Board, on Feb 18, raised in its quarterly dividend by 6% to 35 cents per share from 33 cents. The company generated operating cash flows of $633.3 million in 2013, up roughly 5% year over year.
 
Outlook
 
Looking ahead, Reliance Steel expects metals pricing and demand environment to improve in first-quarter 2014 amid a slow but steady recovery in the U.S. economy. The company expects earnings per share for the quarter to be in the range of $1.20 to $1.30. This is below the current Zacks Consensus Estimate of $1.42.

Reliance Steel sees continued strength in the automotive market and expects healthy operating results across end-markets such as aerospace, energy, semiconductor/electronics and manufactured goods in 2014.

While pricing is expected to remain under pressure, the company expects aerospace demand to improve in 2014. Energy demand and pricing have been forecast to be better this year while a modest improvement is expected in heavy industry. Reliance Steel also sees a modest recovery in non-residential construction market in 2014.

Reliance Steel made capital spending of $168 million during the last year and its Board has approved capital expenditure of $220 million for 2014, a significant part of which will be spent on internal growth initiatives.

Reliance Steel, a Zacks Rank #3 (Hold) stock, remains challenged by weak steel industry fundamentals and contends with soft steel and metals pricing environment. Moreover, non-residential construction, its largest end market, still remains weak.

Nevertheless, Reliance Steel is well placed to leverage the strong momentum across a number of end markets, including automotive and aerospace. Strategic acquisitions and expansion of existing operations should also aid to its results moving ahead.
 
Other metals companies having favorable Zacks Rank are NSK Ltd. (NPSKY), CIRCOR International, Inc. (CIR - Snapshot Report) and Worthington Industries, Inc. (WOR - Snapshot Report). While NSK holds a Zacks Rank #1 (Strong Buy), both CIRCOR and Worthington retain a Zacks Rank #2 (Buy).

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