Reliance Steel & Aluminum Co. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing identifies the registrant as Reliance Steel & Aluminum Co. (NYSE: RS); the request metadata’s “RELIANCE, INC.” does not match the registrant name in the filing.
Business context and results
Reliance distributes and processes metals across a diverse range of products and end markets. Management reported record quarterly sales and profitability, citing strong demand, elevated metal prices, operational execution and careful expense control. The interim results are unaudited and are not necessarily indicative of full-year results.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $4,485.8 million | $2,838.4 million |
| Gross profit / margin | $1,387.1 million / 30.9% | $953.7 million / 33.6% |
| Operating income / margin | $716.1 million / 16.0% | $378.3 million / 13.3% |
| Net income attributable to Reliance | $523.3 million | $266.9 million |
| Diluted EPS | $8.33 | $4.12 |
| Cash from operating activities | $404.0 million | $161.8 million |
Financial position and capital allocation
- Cash and cash equivalents were $548.0 million at quarter-end, up from $300.5 million at December 31, 2021. Total debt was approximately $1.66 billion, broadly unchanged; net debt-to-total capital was 14.4%, versus 18.1% at year-end.
- The $1.5 billion revolving credit facility had no borrowings outstanding. The company reported compliance with its financial covenants. It disclosed $911.4 million of debt obligations due before the facility expires in September 2025, including $500 million of senior notes maturing in April 2023.
- Capital expenditures were $66.7 million. The 2022 capital expenditure budget, including unspent prior-year amounts, was increased to $455 million from $350 million.
- Q1 dividends and equivalents paid were $56.7 million; the quarterly dividend was $0.875 per share. Reliance repurchased 113,529 shares for $17.1 million and had $695.5 million remaining under its $1.0 billion authorization.
Material changes and drivers
- Sales increased 58.0% year over year. Average selling price per ton rose 57.7%, while total tons sold increased 0.6%; same-store tons sold declined 2.5%. The same-store sales increase was 50.1%.
- Gross profit rose 45.4%, but gross margin fell 270 basis points. Management attributed the margin decline principally to inventory costs approaching replacement costs. Operating income increased 89.3% and net income attributable to Reliance increased 96.1%.
- Same-store SG&A increased 13.5%, with higher wage, fuel, freight and packaging costs and incentive compensation. SG&A as a share of sales declined as record sales provided operating leverage.
- Four 2021 acquisitions contributed combined Q1 sales of $226.5 million. Q1 2022 cost of sales included $8.1 million of non-recurring inventory step-up amortization related to those acquisitions.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management said available cash, operating cash flow and the undrawn credit facility should support operating needs, capital investment, acquisitions and shareholder returns.
- Management described metal prices as volatile: prices for certain products fell sharply in January and February before rising significantly in March. It cited ongoing product availability, labor and supply-chain challenges, inflation, COVID-19 effects, and potential effects of the Russia-Ukraine conflict on demand and supply.
- LIFO inventory valuation adjustments charged to cost of sales were $37.5 million, compared with $100.0 million in Q1 2021; the quarter-end LIFO reserve was $857.9 million. The company also reported an $8.1 million acquisition-related inventory step-up charge.
- Environmental remediation at former operations of subsidiary EMJ could involve significant costs, but insurance is expected to cover the majority; Reliance does not expect a material adverse impact. Pending legal matters were described as routine, with no expected material adverse impact.
- Management reported no material change to the risk factors in the 2021 Form 10-K and no material change in internal control over financial reporting. Goodwill was $2.11 billion and net intangible assets were $1.06 billion; impairment evaluations depend on estimates and assumptions.
Important facts for investors to verify
- Whether elevated metal prices and strong demand persist, and how further price movements affect margins, replacement-cost inventory and customer purchasing patterns.
- Whether working-capital needs remain manageable: receivables increased during the quarter, and inventory turns were 4.4 times versus 5.4 times a year earlier.
- The company’s ability to refinance or repay the $500 million notes due in April 2023 and meet other disclosed debt maturities.
- Progress on the $455 million capital budget, acquisition integration, and the pace of dividends and share repurchases.
- Potential effects of supply disruption, inflation, COVID-19 and the Russia-Ukraine conflict, as well as any developments in environmental contingencies or impairment assessments.