Reliance Steel & Aluminum Co. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The filing is for Reliance Steel & Aluminum Co. (NYSE: RS); results are unaudited and interim results may not indicate full-year performance.
Business context and results
Reliance distributes and processes metals. Management cited solid demand across most end markets, particularly non-residential construction, automotive-related toll processing, general manufacturing and aerospace. Tons sold increased, but lower average metal selling prices reduced revenue and earnings.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $3,965.3 million | $4,485.8 million | Down 11.6% |
| Tons sold | 1,520.1 thousand | 1,417.7 thousand | Up 7.2% |
| Average selling price per ton | $2,623 | $3,186 | Down 17.7% |
| Gross profit / margin | $1,226.0 million / 30.9% | $1,387.1 million / 30.9% | Gross profit down 11.6% |
| Operating income / margin | $513.6 million / 13.0% | $716.1 million / 16.0% | Down 28.3% |
| Net income attributable to Reliance | $383.1 million | $523.3 million | Down 26.8% |
| Diluted EPS | $6.43 | $8.33 | Down 22.8% |
| Cash from operations | $384.6 million | $404.0 million | Down $19.4 million |
Gross profit margin is presented by the company as a non-GAAP operating measure that excludes related depreciation and amortization. SG&A rose 6.4% to $651.3 million, driven mainly by costs accompanying higher volumes and inflation in wages, fuel, freight and warehouse expenses; SG&A increased to 16.4% of sales from 13.6%.
Cash, debt and capital allocation
- Cash and cash equivalents were $816.2 million at March 31, versus $1,173.4 million at year-end. The $357.2 million decrease primarily reflected repayment of $500 million of notes, alongside operating cash generation.
- Debt principal was approximately $1.15 billion, including $400 million of 1.30% notes due 2025, $500 million of 2.15% notes due 2030 and $250 million of 6.85% notes due 2036. The company redeemed its $500 million 4.50% notes due 2023 on January 15 using cash.
- No borrowings were outstanding under the $1.5 billion revolving credit facility; nearly $1.5 billion was available, subject to facility terms. The net debt-to-total capital ratio was 4.3%, down from 6.3% at December 31, 2022. The company reported compliance with its financial covenants.
- Investing cash outflow was $102.6 million, including $102.9 million of capital expenditures, a quarterly record. Financing cash outflow was $639.2 million.
- Stockholder returns totaled $100.9 million: $62.0 million in dividends and $38.9 million in share repurchases. The quarterly dividend was $1.00 per share, up from $0.875 a year earlier; $641.8 million remained authorized under the repurchase program.
- Inventory turnover was 4.9 times, versus 4.4 times in Q1 2022; days sales outstanding was 40.0 days, versus 39.1 days.
Changes, outlook and risks
Revenue fell despite higher shipment volume because the average selling price per ton declined, especially for carbon steel. Gross margin held at 30.9%; management attributed resilience to diversified operations, value-added processing and relatively stable metal pricing during most of the quarter. The LIFO inventory reserve was $728.8 million; LIFO accounting reduced cost of sales by $15.0 million in Q1 2023, compared with a $37.5 million expense in Q1 2022. Q1 2022 cost of sales also included an $8.1 million non-recurring inventory step-up amortization benefit.
Management said cash, operating cash generation and revolving-credit availability should be sufficient for operating needs, debt repayment, capital investment, acquisitions and shareholder returns over the next 12 months and beyond. No specific earnings or revenue guidance was provided. Risks cited include metal-price volatility, inflation, labor constraints, supply-chain disruption, higher interest rates, recession or slowdown, COVID-19 impacts, and the Russia-Ukraine conflict, any of which could affect demand, operations or financing access.
After quarter-end, on May 1, 2023, Reliance acquired Southern Steel Supply, LLC, funded with cash on hand. Southern Steel reported $62.9 million of sales for the twelve months ended December 31, 2022. The company said environmental remediation at a former subsidiary operation is expected to be largely covered by insurance and not materially adverse; pending legal matters were described as routine and not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether metal prices and mix continue to pressure average selling prices, and whether higher volumes can sustain gross margins.
- Working-capital and cash-flow trends, including receivables, inventory turnover and the impact of further metal-price changes.
- Capital allocation after the $500 million note redemption, including acquisition spending, dividends and share repurchases.
- Debt maturities and liquidity: the filing reports $408.5 million of debt obligations due before the revolving facility expires in September 2025.
- Integration and financial contribution of the Southern Steel acquisition, and any material developments in the disclosed environmental or litigation matters.