Reliance Steel (NYSE: RS) reported Q3 EPS of $2.42, $0.27 worse than the analyst estimate of $2.69. Revenue for the quarter came in at $2.97 billion versus the consensus estimate of $2.97 billion.

• Net sales were $2.97 billion, the second highest in Company history, up 21.4% from $2.45 billion in the third quarter of 2017 and down 0.5% from record $2.99 billion in the second quarter of 2018.
• Tons sold were down 1.2% from the third quarter of 2017 and down 5.1% from the second quarter of 2018, with the average selling price per ton sold up 23.0% from the third quarter of 2017 and up 4.3% from the second quarter of 2018.
• Gross profit dollars were $834.3 million, the second highest in Company history, with a gross profit margin of 28.0%, in-line with the third quarter of 2017 and down from 30.7% in the second quarter of 2018. FIFO gross profit margin was 30.7%, up from 28.2% in the third quarter of 2017 and down from 32.8% in the second quarter of 2018.
• Pre-tax income was $194.9 million, up 37.1% from $142.2 million in the third quarter of 2017 and down 36.4% from record $306.6 million in the second quarter of 2018. Non-GAAP pre-tax income was $230.8 million, the second highest in Company history, up 65.2% from $139.7 million in the third quarter of 2017 and down 23.3% from record $300.8 million in the second quarter of 2018.
• Net income attributable to Reliance was $148.3 million, up 52.4% from $97.3 million in the third quarter of 2017 and down 35.7% from $230.8 million in the second quarter of 2018. Net income attributable to Reliance for the third quarter of 2018 included a pre-tax impairment and restructuring charge of $36.8 million, or $0.38 per diluted share, primarily related to the downsizing of one of Reliance’s energy businesses, compared to $2.1 million, or $0.02 per diluted share, in the third quarter of 2017.
• Earnings per diluted share were $2.03, up 53.8% from $1.32 in the third quarter of 2017 and down 35.8% from $3.16 in the second quarter of 2018.
• Non-GAAP earnings per diluted share were $2.42, the second highest in Company history, and were up 86.2% from $1.30 in the third quarter of 2017 and down 21.9% from record $3.10 in the second quarter of 2018.
• The effective tax rate was 22.9%, compared to 30.4% in the third quarter of 2017 and 24.0% in the second quarter of 2018.
• Cost of sales includes a pre-tax net LIFO inventory valuation charge, or expense, of $77.5 million, or $0.80 per diluted share, in the third quarter of 2018, compared to $6.3 million, or $0.05 per diluted share, in the third quarter of 2017 and $62.5 million, or $0.65 per diluted share, in the second quarter of 2018.
• Cash flow from operations was $136.3 million in the third quarter of 2018 and net debt-to-total capital was 28.2% at September 30, 2018.
• A quarterly cash dividend of $0.50 per share was declared on October 23, 2018 for stockholders of record as of November 16, 2018 and will be payable on December 7, 2018.

Management Commentary

“We are very pleased with our third quarter performance which was characterized by solid pricing, continued healthy demand and excellent execution by our managers in the field,” said Gregg Mollins, President and Chief Executive Officer of Reliance. “Our earnings were supported by favorable pricing conditions, with prices on the majority of the products we sell remaining at high levels throughout the quarter. As a result, we generated the second highest quarterly net sales in Reliance’s history of $2.97 billion which, when combined with our solid gross profit margin of 28.0%, produced our second highest gross profit dollars of $834.3 million and our second highest non-GAAP pre-tax income of $230.8 million. Our third quarter non-GAAP earnings of $2.42 per diluted share were also the second highest in our Company’s history, growing 86.2% year-over-year. These significant accomplishments were exceeded only by our record results achieved in the prior quarter.”

Mr. Mollins continued, “We are very encouraged by the continuing positive demand conditions that we are seeing across nearly all of the end markets in which we operate. Our tons sold in the third quarter were down 5.1% from the second quarter of 2018, slightly outside of our expected range of down 2% to 4%. The decrease was due to the normal seasonal decline we experience during the summer months, which includes lower shipping volumes due to customer shutdowns and vacation schedules, as well as one less shipping day in the third quarter compared to the second quarter of 2018. Metals pricing across all of our major commodities remained positive. Our average selling price per ton sold increased 4.3% in the third quarter compared to the second quarter of 2018, exceeding our expectations. However, the stronger than forecast pricing environment increased our LIFO estimate for the year, with the “catch-up” adjustment reducing our earnings per diluted share in the quarter by $0.80, compared to the $0.46 per share impact we had anticipated.”

“We continuously evaluate each of our 300 plus operations to determine if they meet our profitability standards. This resulted in our decision to downsize one of our energy businesses as its future outlook has changed due to competitive factors for certain products it sells. Our pre-tax impairment and restructuring charge of $36.8 million for the quarter included costs related to this downsizing as well as the restructuring of a few other small operations,” Mr. Mollins further stated.

Mr. Mollins concluded, “The positive demand and pricing environment in the first nine months of 2018 contributed to Reliance’s achievement of significant earnings milestones. However, these accomplishments would not have been possible without the extraordinary performance of our managers in the field who remain committed to executing disciplined pricing, inventory management and expense control. We continue to experience healthy activity in nearly all of the end markets in which we operate and remain confident in our ability to maximize our earnings power and maintain our focus on increasing value to our stockholders.”

GUIDANCE:

Reliance Steel sees Q4 2018 EPS of $1.75-$1.85, versus the consensus of $1.83.

For earnings history and earnings-related data on Reliance Steel (RS) click here.