Reliance Steel & Aluminum Co. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2023, compared with the same 2022 periods. Reliance distributes and processes metals. Management reported higher tons sold, supported by demand in non-residential construction and aerospace, but lower average selling prices as metals prices fell from 2022 record levels.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3,623.0 million | $4,247.2 million | $11,468.6 million | $13,414.2 million |
| Operating income | $389.5 million | $548.5 million | $1,414.4 million | $2,052.1 million |
| Net income attributable to Reliance | $295.0 million | $393.5 million | $1,063.2 million | $1,489.6 million |
| Diluted EPS | $4.99 | $6.45 | $17.92 | $23.98 |
| Gross profit margin | 29.7% | 29.2% | 30.7% | 30.7% |
- Sales declined 14.7% in Q3 and 14.5% for the nine months year over year. Tons sold increased 1.1% and 3.4%, respectively, while average selling price per ton fell 16.0% and 17.6%.
- Operating margin was 10.8% in Q3 and 12.3% for the nine months, versus 12.9% and 15.3% in 2022. Management attributed lower earnings mainly to price-driven sales and gross-profit declines; lower sales also reduced SG&A operating leverage.
- Cash from operations was $1,145.7 million for the nine months, down from $1,309.9 million. Capital expenditures were $358.6 million, compared with $249.7 million. Investing cash use was $367.8 million; financing cash use was $970.7 million.
- Cash and equivalents were $976.9 million at September 30, 2023, versus $1,173.4 million at year-end 2022. Total debt was approximately $1,151.7 million, including $1,141.6 million in long-term debt; the $1.5 billion revolving facility had no borrowings outstanding.
- Net debt-to-total capital was 2.1%, down from 6.3% at December 31, 2022. Management said liquidity sources should cover operating needs, debt repayment, capital spending, acquisitions, dividends, and repurchases over the next 12 months and beyond. $400.6 million of debt obligations were due before the revolving facility matures in September 2025.
Material changes and notable items
- The company redeemed $500 million of 4.50% senior notes in January 2023 using cash on hand. The weighted average interest rate on outstanding borrowings was 2.88% at September 30, 2023, compared with 3.37% at year-end 2022.
- Reliance acquired Southern Steel Supply on May 1, 2023, funding the purchase with cash on hand. The acquired business contributed $20.2 million of sales during the nine-month period.
- LIFO inventory accounting produced income of $45.0 million in Q3 2023 and $105.0 million for the nine months, compared with $27.5 million and an expense of $22.5 million in the respective 2022 periods. The inventory LIFO reserve was $638.8 million.
- Share repurchases totaled $239.2 million for the nine months, compared with $547.7 million in 2022; dividends and equivalents totaled $179.3 million, compared with $163.5 million. The Board declared a Q4 dividend of $1.00 per share and subsequently increased the repurchase authorization to $1.5 billion, effective October 30, 2023.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance. Management cited healthy demand in key end markets and growth initiatives, while cautioning that economic deterioration, inflation, elevated interest rates, recession, labor constraints, supply-chain disruptions, and geopolitical events could weaken demand or affect financing access.
- Management said gross margins remained stable despite lower metal prices, citing product diversity, small order sizes, value-added processing, and demand across most end markets. Carbon steel prices are particularly influential because carbon steel represented 53% of gross sales for the nine months.
- The company was in compliance with its credit-facility financial covenants. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
- Environmental remediation at former operations of a subsidiary could involve significant costs, but insurance has covered costs to date and is expected to cover most related costs; management does not expect a material adverse impact. Pending legal matters were described as routine, with no material adverse impact expected.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether metal prices and average selling prices stabilize or continue to decline, and how that affects sales, gross margins, and operating leverage.
- Whether demand and tonnage growth in construction, aerospace, and other end markets persist amid the macroeconomic risks identified by management.
- The timing and funding of the $400.6 million of debt obligations due before September 2025, and the company’s liquidity after dividends, repurchases, and investment spending.
- Execution and contribution from Southern Steel Supply, and returns on the elevated capital expenditures and broader organic-growth investments.
- Potential effects of LIFO accounting and the substantial inventory reserve on reported gross profit as metal prices change.
- Actual pace of repurchases under the expanded authorization and whether the $1.00 quarterly dividend is maintained.